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Bankwell Financial Group
BWFG
#7565
Rank
$0.42 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$53.12
Share price
3.73%
Change (1 day)
84.89%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Bankwell Financial Group
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2021 Q3

Bankwell Financial Group - 10-Q quarterly report FY2021 Q3


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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021

or

☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to________

Commission File Number: 001-36448
Bankwell Financial Group, Inc.
(Exact Name of Registrant as specified in its Charter)
Connecticut20-8251355
(State or other jurisdiction of(I.R.S. Employer
Incorporation or organization)Identification No.)
258 Elm Street
New Canaan, Connecticut 06840
(203) 652-0166
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which
Registered
Common Stock, no par value per
share

BWFG
NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨Accelerated filer¨
Non-accelerated filer
☑Smaller reporting company ☑
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

1

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes þ No

As of October 31, 2021, there were 7,842,824 shares of the registrant’s common stock outstanding.
2

Bankwell Financial Group, Inc.
Form 10-Q

Table of Contents
Item 1. Financial Statements (unaudited)
4
Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020
4
Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020
5
Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2021 and 2020
6
Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 30, 2021 and 2020
7
Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020
9
Notes to Consolidated Financial Statements
11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
43
Item 3. Quantitative and Qualitative Disclosures About Market Risk
58
Item 4. Controls and Procedures
59
Item 1. Legal Proceedings
59
Item 1A. Risk Factors
59
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
60
Item 3. Defaults Upon Senior Securities
60
Item 4. Mine Safety Disclosures
60
Item 5. Other Information
60
Item 6. Exhibits
61
61
Certifications
3

PART 1 – FINANCIAL INFORMATION
Item 1. Financial Statements
Bankwell Financial Group, Inc.
Consolidated Balance Sheets - (unaudited)
(In thousands, except share data)
September 30, 2021December 31, 2020
ASSETS
Cash and due from banks$169,417 $405,340 
Federal funds sold8,097 4,258 
Cash and cash equivalents177,514 409,598 
Investment securities
Marketable equity securities, at fair value2,185 2,207 
Available for sale investment securities, at fair value87,565 88,605 
Held to maturity investment securities, at amortized cost (fair values of $18,360 and $20,032 at September 30, 2021 and December 31, 2020, respectively)
16,107 16,078 
Total investment securities105,857 106,890 
Loans receivable (net of allowance for loan losses of $16,803 at September 30, 2021 and $21,009 at December 31, 2020)
1,805,217 1,601,672 
Accrued interest receivable6,911 6,579 
Federal Home Loan Bank stock, at cost3,632 7,860 
Premises and equipment, net35,118 21,762 
Bank-owned life insurance48,903 42,651 
Goodwill2,589 2,589 
Other intangible assets48 76 
Deferred income taxes, net7,718 11,300 
Other assets33,181 42,770 
Total assets$2,226,688 $2,253,747 
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest bearing deposits$338,705 $270,235 
Interest bearing deposits1,544,118 1,557,081 
Total deposits1,882,823 1,827,316 
Advances from the Federal Home Loan Bank80,000 175,000 
Subordinated debentures (face value of $15,500 and $25,500 at September 30, 2021 and December 31, 2020, respectively, less unamortized debt issuance costs of $126 and $242 at September 30, 2021 and December 31, 2020, respectively)
15,374 25,258 
Accrued expenses and other liabilities52,314 49,571 
Total liabilities2,030,511 2,077,145 
Commitments and contingencies
Shareholders' equity
Common stock, no par value; 10,000,000 shares authorized, 7,842,824 and 7,919,278 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively
119,588 121,338 
Retained earnings85,992 70,839 
Accumulated other comprehensive loss(9,403)(15,575)
Total shareholders' equity196,177 176,602 
Total liabilities and shareholders' equity$2,226,688 $2,253,747 

See accompanying notes to consolidated financial statements (unaudited)
4

Bankwell Financial Group, Inc.
Consolidated Statements of Income – (unaudited)
(In thousands, except share data)
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Interest and dividend income
Interest and fees on loans$19,795 $18,027 $56,961 $55,471 
Interest and dividends on securities731 799 2,236 2,402 
Interest on cash and cash equivalents88 96 286 468 
Total interest and dividend income20,614 18,922 59,483 58,341 
Interest expense
Interest expense on deposits2,387 4,104 8,245 14,623 
Interest expense on borrowings503 1,210 2,280 3,187 
Total interest expense2,890 5,314 10,525 17,810 
Net interest income17,724 13,608 48,958 40,531 
Provision (credit) for loan losses134 712 (182)6,896 
Net interest income after provision (credit) for loan losses17,590 12,896 49,140 33,635 
Noninterest income
Gains and fees from sales of loans924 27 2,251 27 
Bank-owned life insurance271 242 753 726 
Service charges and fees199 190 615 578 
Gain on sale of other real estate owned, net— 19 — 19 
Other43 136 1,213 913 
Total noninterest income1,437 614 4,832 2,263 
Noninterest expense
Salaries and employee benefits4,782 5,295 13,511 15,902 
Occupancy and equipment2,615 2,266 8,271 6,410 
Data processing632 529 1,977 1,558 
Professional services498 374 1,632 1,519 
Director fees324 301 968 883 
FDIC insurance298 176 1,001 529 
Marketing186 151 317 512 
Other1,035 637 2,383 1,797 
Total noninterest expense10,370 9,729 30,060 29,110 
Income before income tax expense8,657 3,781 23,912 6,788 
Income tax expense1,802 790 5,140 1,220 
Net income$6,855 $2,991 $18,772 $5,568 
Earnings Per Common Share:
Basic$0.88 $0.38 $2.38 $0.71 
Diluted$0.87 $0.38 $2.37 $0.71 
Weighted Average Common Shares Outstanding:
Basic7,677,822 7,721,247 7,721,943 7,728,798 
Diluted7,738,758 7,721,459 7,779,632 7,749,199 
Dividends per common share$0.18 $0.14 $0.46 $0.42 

See accompanying notes to consolidated financial statements (unaudited)
5

Bankwell Financial Group, Inc.
Consolidated Statements of Comprehensive Income (Loss) – (unaudited)
(In thousands)
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Net income$6,855 $2,991 $18,772 $5,568 
Other comprehensive income (loss):
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains on available for sale securities(411)(97)(743)2,661 
Reclassification adjustment for gain realized in net income— — — — 
Net change in unrealized (losses) gains(411)(97)(743)2,661 
Income tax benefit (expense)92 21 162 (589)
Unrealized (losses) gains on securities, net of tax(319)(76)(581)2,072 
Unrealized gains (losses) on interest rate swaps:
Unrealized gains (losses) on interest rate swaps1,436 2,070 8,671 (16,400)
Income tax (expense) benefit(321)(451)(1,918)3,654 
Unrealized gains (losses) on interest rate swaps, net of tax1,115 1,619 6,753 (12,746)
Total other comprehensive income (loss), net of tax796 1,543 6,172 (10,674)
Comprehensive income (loss)$7,651 $4,534 $24,944 $(5,106)

See accompanying notes to consolidated financial statements (unaudited)
6

Bankwell Financial Group, Inc.
Consolidated Statements of Shareholders' Equity – (unaudited)
(In thousands, except share data)
Number of Outstanding SharesCommon StockRetained EarningsAccumulated Other Comprehensive LossTotal
Balance at June 30, 20217,895,101 $120,451 $80,543 $(10,199)$190,795 
Net income— — 6,855 — 6,855 
Other comprehensive income, net of tax— — — 796 796 
Cash dividends declared ($0.18 per share)
— — (1,406)— (1,406)
Stock-based compensation expense— 562 — — 562 
Repurchase of common stock(52,277)(1,425)— — (1,425)
Balance at September 30, 20217,842,824 $119,588 $85,992 $(9,403)$196,177 
Number of Outstanding SharesCommon StockRetained EarningsAccumulated Other Comprehensive LossTotal
Balance at June 30, 20207,887,503 $120,381 $69,712 $(19,733)$170,360 
Net income— — 2,991 — 2,991 
Other comprehensive income, net of tax— — — 1,543 1,543 
Cash dividends declared ($0.14 per share)
— — (1,100)— (1,100)
Stock-based compensation expense— 473 — — 473 
Issuance of restricted stock9,000 — — — — 
Balance at September 30, 20207,896,503 $120,854 $71,603 $(18,190)$174,267 

See accompanying notes to consolidated financial statements (unaudited)
























7

Bankwell Financial Group, Inc.
Consolidated Statements of Shareholders' Equity – (continued)
(In thousands, except share data)

Number of Outstanding SharesCommon StockRetained EarningsAccumulated Other Comprehensive LossTotal
Balance at December 31, 20207,919,278 $121,338 $70,839 $(15,575)$176,602 
Net income— — 18,772 — 18,772 
Other comprehensive income, net of tax— — — 6,172 6,172 
Cash dividends declared ($0.46 per share)
— — (3,619)— (3,619)
Stock-based compensation expense— 1,418 — — 1,418 
Forfeitures of restricted stock(150)— — — — 
Issuance of restricted stock51,628 — — — — 
Stock options exercised3,500 53 — — 53 
Repurchase of common stock(131,432)(3,221)— — (3,221)
Balance at September 30, 20217,842,824 $119,588 $85,992 $(9,403)$196,177 

Number of Outstanding SharesCommon StockRetained EarningsAccumulated Other Comprehensive LossTotal
Balance at December 31, 20197,868,803 $120,589 $69,324 $(7,516)$182,397 
Net income— — 5,568 — 5,568 
Other comprehensive loss, net of tax— — — (10,674)(10,674)
Cash dividends declared ($0.42 per share)
— — (3,289)— (3,289)
Stock-based compensation expense— 1,286 — — 1,286 
Forfeitures of restricted stock(1,500)— — — — 
Issuance of restricted stock86,199 — — — — 
Stock options exercised1,500 16 — — 16 
Repurchase of common stock(58,499)(1,037)— — (1,037)
Balance at September 30, 20207,896,503 $120,854 $71,603 $(18,190)$174,267 

See accompanying notes to consolidated financial statements (unaudited)
8

Bankwell Financial Group, Inc.
Consolidated Statements of Cash Flows – (unaudited)
(In thousands)
Nine Months Ended September 30,
20212020
Cash flows from operating activities
Net income$18,772 $5,568 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Net amortization of premiums and discounts on investment securities162 47 
(Credit) provision for loan losses(182)6,896 
Provision (credit) for deferred income taxes1,827 (2,353)
Change in fair value of marketable equity securities40 (57)
Depreciation and amortization2,694 2,484 
Amortization of debt issuance costs116 39 
Change in valuation allowance of right-of-use asset(280)— 
Increase in cash surrender value of bank-owned life insurance(753)(726)
Gains and fees from sales of loans(2,251)(27)
Stock-based compensation1,418 1,286 
Amortization of intangibles28 54 
Loss on sale of premises and equipment195 — 
Gain on sale of other real estate owned, net— (19)
Net change in:
Deferred loan fees(420)1,440 
Accrued interest receivable(332)(1,335)
Other assets8,062 (20,322)
Accrued expenses and other liabilities1,056 (1,470)
Net cash provided by (used in) operating activities30,152 (8,495)
Cash flows from investing activities
Proceeds from principal repayments on available for sale securities12,778 9,920 
Proceeds from principal repayments on held to maturity securities4,713 176 
Net proceeds from sales and calls of available for sale securities— 2,200 
Purchases of marketable equity securities(18)(28)
Purchases of available for sale securities(12,649)(17,636)
Purchases of held to maturity securities(4,736)— 
Purchases of bank-owned life insurance(5,500)— 
Net increase in loans(202,943)(20,452)
Loan principal sold from loans not originated for sale(17,122)(214)
Proceeds from sales of loans not originated for sale19,373 241 
Purchases of premises and equipment, net(4,080)(409)
Reduction (purchase) of Federal Home Loan Bank stock4,228 (385)
Proceeds from the sale of other real estate owned— 199 
Net cash used in investing activities(205,956)(26,388)
See accompanying notes to consolidated financial statements (unaudited)
9

Bankwell Financial Group, Inc.
Consolidated Statements of Cash Flows - (Continued)
(In thousands)
Nine Months Ended September 30,
20212020
Cash flows from financing activities
Net change in time certificates of deposit$(210,083)$89,072 
Net change in other deposits265,590 186,553 
Net change in FHLB advances(95,000)25,000 
Repayment of subordinated debt(10,000)— 
Proceeds from exercise of options53 16 
Dividends paid on common stock(3,619)(3,289)
Repurchase of common stock(3,221)(1,037)
Net cash (used in) provided by financing activities(56,280)296,315 
Net (decrease) increase in cash and cash equivalents(232,084)261,432 
Cash and cash equivalents:
Beginning of year409,598 78,051 
End of period$177,514 $339,483 
Supplemental disclosures of cash flows information:
Cash paid for:
Interest$3,707 $18,067 
Income taxes4,024 3,393 
Noncash investing and financing activities:
Loans transferred to other real estate owned$— $180 
Net change in unrealized gains or losses on available for sale securities743 2,661 
Net change in unrealized gains or losses on interest rate swaps8,671 (16,400)
Establishment of right-of-use asset and lease liability11,885 169 

See accompanying notes to consolidated financial statements (unaudited)
10


1. Nature of Operations and Summary of Significant Accounting Policies

Bankwell Financial Group, Inc. (the "Parent Corporation") is a bank holding company headquartered in New Canaan, Connecticut. The Parent Corporation offers a broad range of financial services through its banking subsidiary, Bankwell Bank (the "Bank" and, collectively with the Parent Corporation and the Parent Corporation's subsidiaries, the "Company").

The Bank is a Connecticut state chartered commercial bank, founded in 2002, whose deposits are insured under the Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation (“FDIC”). The Bank provides a wide range of services to customers in our primary market, an area encompassing approximately a 100 mile radius around our branch network. In addition, the Bank pursues certain types of commercial lending opportunities outside our primary market, particularly where we have strong relationships. The Bank operates branches in New Canaan, Stamford, Fairfield, Wilton, Westport, Darien, Norwalk, and Hamden, Connecticut.

Principles of consolidation

The consolidated financial statements include the accounts of the Company and the Bank, including its wholly owned passive investment company subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of estimates

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and general practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities as of the date of the consolidated balance sheet, and revenue and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the allowance for loan losses, the valuation of derivative instruments, investment securities valuation, evaluation of investment securities for other than temporary impairment and deferred income taxes valuation.

The COVID-19 pandemic has resulted in significant economic disruption affecting our business and the clients we serve. As vaccination efforts continue, restrictions on businesses have been lifted and a return to more normal economic activity has begun. However, a significant degree of uncertainty still exists concerning the ultimate duration and magnitude of the COVID-19 pandemic and subsequent outbreaks, including whether restrictions that have been lifted will need to be imposed again or tightened in the future. Given the ongoing and dynamic nature of the circumstances, it is still difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, including but not limited to the continued roll-out of vaccinations, which play an important role as to when the coronavirus can be controlled and abated.

Basis of consolidated financial statement presentation

The unaudited consolidated financial statements presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and Rule 10-01 of Regulation S-X and do not include all of the information and note disclosures required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for the fair presentation of the accompanying unaudited interim consolidated financial statements have been included. Interim results are not necessarily reflective of the results that may be expected for the year ending December 31, 2021. The accompanying unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included on Form 10-K for the year ended December 31, 2020.

Significant concentrations of credit risk

Many of the Company's activities are with customers located in Connecticut and New York, with the majority of the Company's loans in Connecticut and some New York metro area counties. Declines in property values in these areas could significantly impact the Company. The Company has a significant concentration in commercial real estate loans.


11

Common Share Repurchases

The Company is incorporated in the state of Connecticut. Connecticut law does not provide for treasury shares, rather shares repurchased by the Company constitute authorized, but unissued shares. GAAP states that accounting for treasury stock shall conform to state law. Therefore, the cost of shares repurchased by the Company has been allocated to common stock balances.

Reclassification

Certain prior period amounts may be reclassified to conform to the 2021 financial statement presentation. These reclassifications only change the reporting categories and do not affect the consolidated results of operations or consolidated financial position of the Company.

Recent accounting pronouncements

The following section includes changes in accounting principles and potential effects of new accounting guidance and pronouncements.

Recently issued accounting pronouncements not yet adopted
ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments.” This ASU changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward looking “expected loss” model that will replace today’s “incurred loss” model and can result in the earlier recognition of credit losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. On July 17, 2019, the FASB proposed deferring the effective date of ASC 326 for smaller reporting companies as defined by the SEC. The FASB proposed a three year deferral for smaller reporting companies, with an effective date of January 1, 2023. On October 16, 2019, the FASB voted in favor of finalizing its proposal to defer the effective date of this standard. The FASB issued ASU No. 2019-10, which officially delayed the adoption of this standard for smaller reporting companies until fiscal years beginning after December 15, 2022. The Company does qualify to defer the adoption of this standard and has not yet adopted this standard. Management continues to evaluate the impact of its future adoption of this guidance on the Company’s financial statements.

ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): “Simplifying the Test for Goodwill Impairment.” This ASU simplifies the test for goodwill impairment by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity was required to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, this ASU also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. On October 16, 2019, the FASB voted in favor of a proposal to defer the effective date of this standard in the same manner it is deferring the effective date of ASC 326. The FASB issued ASU No. 2019-10, which officially delayed the adoption of this standard for smaller reporting companies until fiscal years beginning after December 15, 2022. The Company does qualify to defer the adoption of this standard and has not yet adopted this standard. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements.

Recently adopted accounting pronouncements
ASU No. 2020-04, Reference Rate Reform (Topic 848): "Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. Optional expedients include that modifications of contracts should be accounted for by prospectively adjusting the effective interest rate and modifications of leases should be accounted for as a continuation of the
12

existing contract with no reassessments of lease classification and discount rate or remeasurements of lease payments. This ASU also provides many practical expedients for derivative accounting. In addition, an entity may elect to sell and/or transfer held to maturity securities that reference a rate affected by the reference rate reform classified as held to maturity prior to January 1, 2020. In particular, the Company made the following elections as it relates to hedging relationships; (1) Option to not reassess a previous accounting determination (paragraph 848-20-35-2); (2) Option to not dedesignate a hedging relationship due to a change in critical term (paragraph 848-20-35-3); (3) Option to change the contractual terms of a hedging instrument, hedged item, or forecasted transaction and to not dedesignate a hedging relationship (paragraph 848-30-25-5); (4) Adopt expedient ASC 848-50-25-2 to assert probability of the hedged interest regardless of any expected modification in terms related to reference rate reform; and (5) To continue the method of assessing effectiveness as documented in the original hedge documentation and apply the expedient in ASC 848-50-35-17 so that the reference rate on the hypothetical derivative matches the reference rate on the hedging instrument. For new hedging relationships designated subsequent to December 31, 2020, the Company elects to apply the expedient in ASC 848-50-25-11 to assume that the reference rate will not be replaced for the remainder of the hedging relationship. The application of this guidance did not have a material impact on the Company's financial statements.

2. Investment Securities

The amortized cost, gross unrealized gains and losses and fair value of available for sale and held to maturity securities at September 30, 2021 were as follows:
September 30, 2021
Amortized CostGross UnrealizedFair Value
GainsLosses
(In thousands)
Available for sale securities:
U.S. Government and agency obligations
Less than one year$9,995 $32 $— $10,027 
Due from one through five years10,598 — (57)10,541 
Due from five through ten years7,904 604 — 8,508 
Due after ten years42,780 1,674 (37)44,417 
Total U.S. Government and agency obligations71,277 2,310 (94)73,493 
Corporate bonds
Due from one through five years1,000 17 — 1,017 
Due from five through ten years11,000 461 — 11,461 
Due after ten years1,500 94 — 1,594 
Total corporate bonds13,500 572 — 14,072 
Total available for sale securities$84,777 $2,882 $(94)$87,565 
Held to maturity securities:
State agency and municipal obligations
Due after ten years$16,058 $2,518 $(273)$18,303 
Government-sponsored mortgage backed securities
No contractual maturity49 8 — 57 
Total held to maturity securities$16,107 $2,526 $(273)$18,360 
13

The amortized cost, gross unrealized gains and losses and fair value of available for sale and held to maturity securities at December 31, 2020 were as follows:
December 31, 2020
Amortized CostGross UnrealizedFair Value
GainsLosses
(In thousands)
Available for sale securities:
U.S. Government and agency obligations
Less than one year$9,976 $172 $— $10,148 
Due from five through ten years8,038 848 — 8,886 
Due after ten years55,560 2,284 — 57,844 
Total U.S. Government and agency obligations73,574 3,304 — 76,878 
Corporate bonds
Due from one through five years4,000 57 — 4,057 
Due from five through ten years6,000 163 — 6,163 
Due after ten years1,500 7 — 1,507 
Total corporate bonds11,500 227 — 11,727 
Total available for sale securities$85,074 $3,531 $— $88,605 
Held to maturity securities:
State agency and municipal obligations
Due after ten years$16,018 $3,944 $— $19,962 
Government-sponsored mortgage backed securities
No contractual maturity60 10 — 70 
Total held to maturity securities$16,078 $3,954 $— $20,032 

There were no sales of investment securities during the three or nine months ended September 30, 2021 or 2020.

At September 30, 2021 and December 31, 2020, none of the Company's securities were pledged as collateral with the Federal Home Loan Bank ("FHLB") or any other institution.

As of September 30, 2021 and December 31, 2020, the actual durations of the Company's available for sale securities were significantly shorter than the stated maturities.

As of September 30, 2021, the Company held marketable equity securities with a fair value of $2.2 million and an amortized cost of $2.1 million. At December 31, 2020, the Company held marketable equity securities with a fair value of $2.2 million and an amortized cost of $2.1 million. These securities represent an investment in mutual funds that have an objective to make investments for CRA purposes.

There were no investment securities as of December 31, 2020, in which the fair value of the security was less than the amortized cost of the security.


14

The following table provides information regarding investment securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2021:

Length of Time in Continuous Unrealized Loss Position
Less Than 12 Months12 Months or MoreTotal
Fair ValueUnrealized
Loss		Percent
Decline from
Amortized Cost		Fair ValueUnrealized
Loss		Percent
Decline from
Amortized Cost		Fair ValueUnrealized
Loss		Percent
Decline from
Amortized Cost
(Dollars in thousands)
September 30, 2021
U.S. Government and agency obligations$18,519 $(94)0.50 %$— $— — %$18,519 $(94)0.50 %
State agency and municipal obligations4,392 (273)5.85 — — — 4,392 (273)5.85 
Total investment securities$22,911 $(367)1.58 %$— $— — %$22,911 $(367)1.58 %

There were three investment securities as of September 30, 2021, in which the fair value of the security was less than the amortized cost of the security.

The U.S. Government and agency obligations owned are either direct obligations of the U.S. Government or guaranteed by the U.S. Government, therefore the contractual cash flows are guaranteed and as a result the unrealized losses in this portfolio are considered to be only temporarily impaired.

The Company continually monitors its state agency and municipal bond portfolios and at this time these portfolios have minimal default risk because state agency and municipal bonds are all rated investment grade or deemed to be of investment grade quality.

The Company has the intent and ability to retain its investment securities in an unrealized loss position at September 30, 2021 until the decline in value has recovered or the security has matured.


15

3. Loans Receivable and Allowance for Loan Losses

The following table sets forth a summary of the loan portfolio at September 30, 2021 and December 31, 2020:
(In thousands)September 30, 2021December 31, 2020
Real estate loans:
Residential$90,110 $113,557 
Commercial1,337,896 1,148,383 
Construction94,665 87,007 
1,522,671 1,348,947 
Commercial business (1)
292,825 276,601 
Consumer9,050 79 
Total loans1,824,546 1,625,627 
Allowance for loan losses(16,803)(21,009)
Deferred loan origination fees, net(2,526)(2,946)
Loans receivable, net$1,805,217 $1,601,672 

(1) The September 30, 2021 and December 31, 2020 balance includes $1.6 million and $34.8 million, respectively, of Paycheck Protection Program ("PPP") loans made under the CARES Act.

Lending activities consist of commercial real estate loans, commercial business loans and, to a lesser degree, a variety of consumer loans. Loans may also be granted for the construction of commercial properties. The majority of commercial mortgage loans are collateralized by first or second mortgages on real estate.

Risk management

The Company has established credit policies applicable to each type of lending activity in which it engages. The Company evaluates the creditworthiness of each customer and extends credit of up to 80% of the market value of the collateral, depending on the borrower's creditworthiness and the type of collateral. The borrower’s ability to service the debt is monitored on an ongoing basis. Real estate is the primary form of collateral. Other important forms of collateral are business assets, time deposits and marketable securities. While collateral provides assurance as a secondary source of repayment, the Company ordinarily requires the primary source of repayment for commercial loans to be based on the borrower’s ability to generate continuing cash flows. In the fourth quarter of 2017, management made the strategic decision to cease the origination of residential mortgage loans. At the beginning of the third quarter 2019, the Company no longer offered home equity loans or lines of credit. The Company’s policy for residential lending generally required that the amount of the loan may not exceed 80% of the original appraised value of the property. In certain situations, the amount may have exceeded 80% LTV either with private mortgage insurance being required for that portion of the residential loan in excess of 80% of the appraised value of the property or where secondary financing is provided by a housing authority program second mortgage, a community’s low/moderate income housing program, or a religious or civic organization.


16

Credit quality of loans and the allowance for loan losses

Management segregates the loan portfolio into defined segments, which are used to develop and document a systematic method for determining the Company's allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate.

The Company's loan portfolio is segregated into the following portfolio segments:

Residential Real Estate: This portfolio segment consists of first mortgage loans secured by one-to-four family owner occupied residential properties for personal use located in the Company's market area. This segment also includes home equity loans and home equity lines of credit secured by owner occupied one-to-four family residential properties. Loans of this type were written at a combined maximum of 80% of the appraised value of the property and the Company requires a first or second lien position on the property. These loans can be affected by economic conditions and the values of the underlying properties.

Commercial Real Estate: This portfolio segment includes loans secured by commercial real estate, multi-family dwellings, owner-occupied commercial real estate and investor-owned one-to-four family dwellings. Loans secured by commercial real estate generally have larger loan balances and more credit risk than owner occupied one-to-four family mortgage loans.

Construction: This portfolio segment includes commercial construction loans for commercial development projects, including apartment buildings and condominiums, as well as office buildings, retail and other income producing properties and land loans, which are loans made with land as collateral. Construction and land development financing generally involves greater credit risk than long-term financing on improved, owner-occupied or leased real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, the Company may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment through sale or refinance. Construction loans also expose the Company to the risks that improvements will not be completed on time in accordance with specifications and projected costs and that repayment will depend on the successful operation or sale of the properties, which may cause some borrowers to be unable to continue paying debt service, which exposes the Company to greater risk of non-payment and loss.

Commercial Business: This portfolio segment includes commercial business loans secured by assignments of corporate assets and personal guarantees of the business owners. Commercial business loans generally have higher interest rates and shorter terms than other loans, but they also have increased difficulty of loan monitoring and a higher risk of default since their repayment generally depends on the successful operation of the borrower’s business. This segment also includes Paycheck Protection Program ("PPP") loans made under the CARES Act to small businesses impacted by COVID-19, to cover payroll and other operating expenses. Loans extended under the PPP are fully guaranteed by the U.S. Small Business Administration ("SBA").

Consumer: This portfolio segment includes loans secured by savings or certificate accounts, automobiles, as well as unsecured personal loans and overdraft lines of credit. In addition, there are loans to finance insurance premiums, secured by the cash surrender value of life insurance and marketable securities.



17

Allowance for loan losses

The following tables set forth the activity in the Company’s allowance for loan losses for the three and nine months ended September 30, 2021 and 2020, by portfolio segment:
Residential Real EstateCommercial Real EstateConstructionCommercial BusinessConsumerTotal
(In thousands)
Three Months Ended September 30, 2021
Beginning balance$318 $13,209 $133 $2,976 $36 $16,672 
Charge-offs— — — — (15)(15)
Recoveries— — — 11 1 12 
Provisions (credits)158 37 9 (84)14 134 
Ending balance$476 $13,246 $142 $2,903 $36 $16,803 

Residential Real EstateCommercial Real EstateConstructionCommercial BusinessConsumerTotal
(In thousands)
Three Months Ended September 30, 2020
Beginning balance$809 $14,409 $441 $4,003 $— $19,662 
Charge-offs— — — — (4)(4)
Recoveries— — — — 2 2 
(Credits) provisions(95)491 (7)321 2 712 
Ending balance$714 $14,900 $434 $4,324 $— $20,372 

Residential Real EstateCommercial Real EstateConstructionCommercial BusinessConsumerTotal
(In thousands)
Nine Months Ended September 30, 2021
Beginning balance$610 $16,425 $221 $3,753 $— $21,009 
Charge-offs— (3,977)— (51)(33)(4,061)
Recoveries— — — 27 10 37 
(Credits) provisions(134)798 (79)(826)59 (182)
Ending balance$476 $13,246 $142 $2,903 $36 $16,803 

Residential Real EstateCommercial Real EstateConstructionCommercial BusinessConsumerTotal
(In thousands)
Nine Months Ended September 30, 2020
Beginning balance$730 $10,551 $324 $1,903 $1 $13,509 
Charge-offs— — — (7)(29)(36)
Recoveries— — — 1 2 3 
(Credits) provisions(16)4,349 110 2,427 26 6,896 
Ending balance$714 $14,900 $434 $4,324 $— $20,372 



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Loans evaluated for impairment and the related allowance for loan losses as of September 30, 2021 and December 31, 2020 were as follows:
PortfolioAllowance
(In thousands)
September 30, 2021
Loans individually evaluated for impairment:
Residential real estate$4,817 $189 
Commercial real estate31,489 2,618 
Construction8,997 — 
Commercial business4,731 65 
Subtotal50,034 2,872 
Loans collectively evaluated for impairment:
Residential real estate85,293 287 
Commercial real estate1,306,407 10,628 
Construction85,668 142 
Commercial business288,094 2,838 
Consumer9,050 36 
Subtotal1,774,512 13,931 
Total$1,824,546 $16,803 

PortfolioAllowance
(In thousands)
December 31, 2020
Loans individually evaluated for impairment:
Residential real estate$4,604 $— 
Commercial real estate37,579 4,960 
Construction8,997 — 
Commercial business6,507 85 
Subtotal57,687 5,045 
Loans collectively evaluated for impairment:
Residential real estate108,953 610 
Commercial real estate1,110,804 11,465 
Construction78,010 221 
Commercial business270,094 3,668 
Consumer79 — 
Subtotal1,567,940 15,964 
Total$1,625,627 $21,009 

As of December 31, 2020, $57.7 million of loans were individually evaluated for impairment and $10.0 million of these loans were determined not impaired.

Credit quality indicators

To measure credit risk for the loan portfolios, the Company employs a credit risk rating system. This risk rating represents an assessed level of a loan’s risk based on the character and creditworthiness of the borrower/guarantor, the capacity of the borrower to adequately service the debt, any credit enhancements or additional sources of repayment, and the quality, value and coverage of the collateral, if any.
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The objectives of the Company’s risk rating system are to provide the Board of Directors and senior management with an objective assessment of the overall quality of the loan portfolio, to promptly and accurately identify loans with well-defined credit weaknesses so that timely action can be taken to minimize a potential credit loss, to identify relevant trends affecting the collectability of the loan portfolio, to isolate potential problem areas and to provide essential information for determining the adequacy of the allowance for loan losses. The Company’s credit risk rating system has nine grades, with each grade corresponding to a progressively greater risk of default. Risk ratings of (1) through (5) are "pass" categories and risk ratings of (6) through (9) are criticized asset categories as defined by the regulatory agencies.

A “special mention” (6) credit has a potential weakness which, if uncorrected, may result in a deterioration of the repayment prospects or inadequately protect the Company’s credit position at some time in the future. “Substandard” (7) loans are credits that have a well-defined weakness or weaknesses that jeopardize the full repayment of the debt. An asset rated “doubtful” (8) has all the weaknesses inherent in a substandard asset and which, in addition, make collection or liquidation in full highly questionable and improbable when considering existing facts, conditions, and values. Loans classified as “loss” (9) are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value; rather, it is not practical or desirable to defer writing-off this asset even though partial recovery may be made in the future.

Risk ratings are assigned as necessary to differentiate risk within the portfolio. They are reviewed on an ongoing basis through the annual loan review process performed by Company personnel, normal renewal activity and the quarterly watchlist and watched asset report process. They are revised to reflect changes in the borrower's financial condition and outlook, debt service coverage capability, repayment performance, collateral value and coverage, as well as other considerations. In addition to internal review at multiple points, outsourced loan review opines on risk ratings with regard to the sample of loans their review covers.
20

The following tables present credit risk ratings by loan segment as of September 30, 2021 and December 31, 2020:
Commercial Credit Quality Indicators
September 30, 2021December 31, 2020
Commercial Real EstateConstructionCommercial BusinessTotalCommercial Real EstateConstructionCommercial BusinessTotal
(In thousands)
Pass$1,287,568 $85,668 $286,641 $1,659,877 $1,105,825 $78,010 $269,728 $1,453,563 
Special Mention18,839 — 1,454 20,293 12,560 — 2,055 14,615 
Substandard31,072 8,997 3,198 43,267 29,998 8,997 3,247 42,242 
Doubtful417 — 1,532 1,949 — — 1,571 1,571 
Loss— — — — — — — — 
Total loans$1,337,896 $94,665 $292,825 $1,725,386 $1,148,383 $87,007 $276,601 $1,511,991 

Residential and Consumer Credit Quality Indicators
September 30, 2021December 31, 2020
Residential Real EstateConsumerTotalResidential Real EstateConsumerTotal
(In thousands)
Pass$85,293 $9,050 $94,343 $108,953 $79 $109,032 
Special Mention— — — 713 — 713 
Substandard4,642 — 4,642 3,714 — 3,714 
Doubtful175 — 175 177 — 177 
Loss— — — — — — 
Total loans$90,110 $9,050 $99,160 $113,557 $79 $113,636 



Loan portfolio aging analysis

When a loan is 15 days past due, the Company sends the borrower a late notice. The Company attempts to contact the borrower by phone if the delinquency is not corrected promptly after the notice has been sent. When the loan is 30 days past due, the Company mails the borrower a letter reminding the borrower of the delinquency, and attempts to contact the borrower personally to determine the reason for the delinquency and ensure the borrower understands the terms of the loan. If necessary, after the 90th day of delinquency, the Company may take other appropriate legal action. A summary report of all loans 30 days or more past due is provided to the Board of Directors of the Company periodically. Loans greater than 90 days past due are generally put on nonaccrual status. A nonaccrual loan is restored to accrual status when it is no longer delinquent and collectability of interest and principal is no longer in doubt. A loan is considered to be no longer delinquent when timely payments are made for a period of at least six months (one year for loans providing for quarterly or semi-annual payments) by the borrower in accordance with the contractual terms. Loans that are granted payment deferrals under the CARES Act are not required to be reported as past due or placed on non-accrual status if the criteria under section 4013 of the CARES Act is met. As of September 30, 2021, no loans remained on active deferral under the CARES Act.

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The following tables set forth certain information with respect to the Company's loan portfolio delinquencies by portfolio segment as of September 30, 2021 and December 31, 2020:
September 30, 2021
30-59 Days Past Due60-89 Days Past Due90 Days or Greater Past DueTotal Past DueCurrentTotal Loans
(In thousands)
Real estate loans:
Residential real estate$1,535 $703 $176 $2,414 $87,696 $90,110 
Commercial real estate877 10,500 5,013 16,390 1,321,506 1,337,896 
Construction— — 8,997 8,997 85,668 94,665 
Commercial business— 1,463 1,485 2,948 289,877 292,825 
Consumer— — — — 9,050 9,050 
Total loans$2,412 $12,666 $15,671 $30,749 $1,793,797 $1,824,546 

December 31, 2020
30-59 Days Past Due60-89 Days Past Due90 Days or Greater Past DueTotal Past DueCurrentTotal Loans
(In thousands)
Real estate loans:
Residential real estate$245 $— $177 $422 $113,135 $113,557 
Commercial real estate1,305 193 2,541 4,039 1,144,344 1,148,383 
Construction8,997 — — 8,997 78,010 87,007 
Commercial business45 55 1,526 1,626 274,975 276,601 
Consumer— — — — 79 79 
Total loans$10,592 $248 $4,244 $15,084 $1,610,543 $1,625,627 

There were no loans delinquent greater than 90 days and still accruing interest as of September 30, 2021 and December 31, 2020.

Loans on nonaccrual status

The following is a summary of nonaccrual loans by portfolio segment as of September 30, 2021 and December 31, 2020:
September 30, 2021December 31, 2020
(In thousands)
Residential real estate$1,849 $1,492 
Commercial real estate16,314 21,093 
Commercial business1,754 1,834 
Construction8,997 8,997 
Total$28,914 $33,416 

Interest income on loans that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms for the nine months ended September 30, 2021 and 2020 was $0.9 million and $0.6 million, respectively. There was $49 thousand and no interest income recognized on these loans for the nine months ended September 30, 2021 and 2020, respectively.

At September 30, 2021 and December 31, 2020, there were no commitments to lend additional funds to any borrower on nonaccrual status. Nonaccrual loans with no specific reserve totaled $16.1 million and $17.5 million at September 30, 2021 and December 31, 2020, respectively, as these loans were deemed to be adequately collateralized.
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Impaired loans

An impaired loan is generally one for which it is probable, based on current information, that the Company will not collect all the amounts due in accordance with the contractual terms of the loan. Impaired loans are individually evaluated for impairment. When the Company classifies a problem loan as impaired, it evaluates whether a specific valuation allowance is required for that portion of the asset that is estimated to be impaired.

The following table summarizes impaired loans by portfolio segment as of September 30, 2021 and December 31, 2020:
Carrying AmountUnpaid Principal BalanceAssociated Allowance
September 30, 2021December 31, 2020September 30, 2021December 31, 2020September 30, 2021December 31, 2020
(In thousands)
Impaired loans without a valuation allowance:
Residential real estate$3,048 $3,891 $3,224 $4,108 $— $— 
Commercial real estate10,137 8,964 10,490 9,282 — — 
Construction8,997 8,997 8,997 8,997 — — 
Commercial business1,971 1,899 2,608 2,512 — — 
Total impaired loans without a valuation allowance24,153 23,751 25,319 24,899 — — 
Impaired loans with a valuation allowance:
Residential real estate$1,769 $— $1,769 $— $189 $— 
Commercial real estate21,352 21,035 21,394 21,049 2,618 4,960 
Commercial business2,760 2,920 2,760 2,922 65 85 
Total impaired loans with a valuation allowance25,881 23,955 25,923 23,971 2,872 5,045 
Total impaired loans$50,034 $47,706 $51,242 $48,870 $2,872 $5,045 
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The following tables summarize the average carrying amount of impaired loans and interest income recognized on impaired loans by portfolio segment for the three and nine months ended September 30, 2021 and 2020:
Average Carrying AmountInterest Income Recognized
Three Months Ended September 30,Three Months Ended September 30,
2021202020212020
(In thousands)
Impaired loans without a valuation allowance:
Residential real estate$3,058 $4,035 $13 $16 
Commercial real estate10,153 7,376 72 37 
Commercial business1,987 4,123 5 5 
Construction8,997 — — — 
Total impaired loans without a valuation allowance24,195 15,534 90 58 
Impaired loans with a valuation allowance:
Residential real estate$1,775 $— $12 $— 
Commercial real estate20,301 6,259 62 78 
Commercial business2,763 30 18 — 
Total impaired loans with a valuation allowance24,839 6,289 92 78 
Total impaired loans$49,034 $21,823 $182 $136 

Average Carrying AmountInterest Income Recognized
Nine Months Ended
September 30,		Nine Months Ended
September 30,
2021202020212020
(In thousands)
Impaired loans without a valuation allowance:
Residential real estate$3,080 $4,083 $28 $70 
Commercial real estate10,121 7,513 435 109 
Commercial business2,018 4,173 18 15 
Construction8,997 — — — 
Total impaired loans without a valuation allowance24,216 15,769 481 194 
Impaired loans with a valuation allowance:
Residential real estate$1,791 $— $40 $— 
Commercial real estate22,386 6,278 490 204 
Commercial business2,772 30 76 — 
Total impaired loans with a valuation allowance26,949 6,308 606 204 
Total impaired loans$51,165 $22,077 $1,087 $398 

Troubled debt restructurings ("TDRs")

Modifications to a loan are considered to be a troubled debt restructuring when both of the following conditions are met: 1) the borrower is experiencing financial difficulties and 2) the modification constitutes a concession that is not in line with market rates and/or terms. Modified terms are dependent upon the financial position and needs of the individual borrower. Troubled debt restructurings are classified as impaired loans.

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If a performing loan is restructured into a TDR, it remains in performing status. If a nonperforming loan is restructured into a TDR, it continues to be carried in nonaccrual status. Nonaccrual classification may be removed if the borrower demonstrates compliance with the modified terms for a minimum of six months.

Loans classified as TDRs totaled $26.9 million at September 30, 2021 and $9.1 million at December 31, 2020. The following tables provide information on loans that were modified as TDRs during the periods indicated.

Number of LoansPre-ModificationPost-Modification
(Dollars in thousands)202120202021202020212020
Three Months Ended September 30,
Commercial real estate1 — $10,317 $— $10,402 $— 
Total1 — $10,317 $— $10,402 $— 

Number of LoansPre-ModificationPost-Modification
(Dollars in thousands)202120202021202020212020
Nine Months Ended September 30,
Residential real estate2 — $764 $— $764 $— 
Commercial business1 — 2,567 — 2,655 — 
Commercial real estate2 — 13,534 — 13,570 — 
Total5 — $16,865 $— $16,989 $— 

At September 30, 2021 and December 31, 2020, there were five nonaccrual loans identified as TDRs totaling $12.4 million and three nonaccrual loans identified as TDRs totaling $1.4 million, respectively.

There were no loans modified in a troubled debt restructuring that re-defaulted during the nine months ended September 30, 2021 and September 30, 2020.

The following table provides information on how loans were modified as TDRs during the three and nine months ended September 30, 2021 and September 30, 2020.

Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
(In thousands)
Payment concession$— $— $764 $— 
Maturity, rate and payment concession10,402 — 13,057 — 
Rate concession— — 3,168 — 
Total$10,402 $— $16,989 $— 

Section 4013 of the CARES Act provides relief from certain requirements under GAAP and permits a financial institution to elect to suspend troubled debt restructuring accounting, in certain circumstances, beginning March 1, 2020 and ending on the earlier of January 1, 2022, or sixty days after the national emergency concerning COVID-19 terminates. All short term loan modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any request for relief are not considered TDRs.    

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4. Shareholders' Equity

Common Stock

The Company has 10,000,000 shares authorized and 7,842,824 shares issued and outstanding at September 30, 2021 and 10,000,000 shares authorized and 7,919,278 shares issued and outstanding at December 31, 2020. The Company's stock is traded on the NASDAQ stock market under the ticker symbol BWFG.

Dividends

The Company’s shareholders are entitled to dividends when and if declared by the Board of Directors out of funds legally available. The ability of the Company to pay dividends depends, in part, on the ability of the Bank to pay dividends to the Company. In accordance with Connecticut statutes, regulatory approval is required to pay dividends in excess of the Bank’s profits retained in the current year plus retained profits from the previous two years. The Bank is also prohibited from paying dividends that would reduce its capital ratios below minimum regulatory requirements.

Issuer Purchases of Equity Securities

On December 19, 2018, the Company's Board of Directors authorized a share repurchase program of up to 400,000 shares of the Company's Common Stock. The Company intends to accomplish the share repurchases through open market transactions, though the Company could accomplish repurchases through other means, such as privately negotiated transactions. The timing, price and volume of repurchases will be based on market conditions, relevant securities laws and other factors. The share repurchase plan does not obligate the Company to acquire any particular amount of Common Stock, and it may be modified or suspended at any time at the Company's discretion. During the nine months ended September 30, 2021, the Company purchased 131,432 shares of its Common Stock at a weighted average price of $24.50 per share. During the year ended December 31, 2020, the Company purchased 58,499 shares of its Common Stock at a weighted average price of $17.69 per share.

5. Comprehensive Income

Comprehensive income represents the sum of net income and items of other comprehensive income or loss, including net unrealized gains or losses on securities available for sale and net unrealized gains or losses on derivatives. The Company's derivative instruments are utilized to manage economic risks, including interest rate risk. Changes in fair value of the Company's derivatives are primarily driven by changes in interest rates and recognized in other comprehensive income. The Company's current derivative positions will cause a decrease to other comprehensive income in a falling interest rate environment and an increase in a rising interest rate environment. The Company’s total comprehensive income or loss for the three and nine months ended September 30, 2021 and September 30, 2020 is reported in the Consolidated Statements of Comprehensive Income.

26

The following tables present the changes in accumulated other comprehensive income (loss) by component, net of tax for the three and nine months ended September 30, 2021 and September 30, 2020:    

Net Unrealized Gain (Loss) on Available for Sale SecuritiesNet Unrealized Gain (Loss) on Interest Rate SwapsTotal
(In thousands)
Balance at June 30, 2021$2,482 $(12,681)$(10,199)
Other comprehensive (loss) income before reclassifications, net of tax(319)400 81 
Amounts reclassified from accumulated other comprehensive income, net of tax— 715 715 
Net other comprehensive (loss) income(319)1,115 796 
Balance at September 30, 2021$2,163 $(11,566)$(9,403)


Net Unrealized Gain (Loss) on Available for Sale SecuritiesNet Unrealized Gain (Loss) on Interest Rate SwapsTotal
(In thousands)
Balance at June 30, 2020$3,076 $(22,809)$(19,733)
Other comprehensive (loss) income before reclassifications, net of tax(76)977 901 
Amounts reclassified from accumulated other comprehensive income, net of tax— 642 642 
Net other comprehensive (loss) income(76)1,619 1,543 
Balance at September 30, 2020$3,000 $(21,190)$(18,190)


Net Unrealized Gain (Loss) on Available for Sale SecuritiesNet Unrealized Gain (Loss) on Interest Rate SwapsTotal
(In thousands)
Balance at December 31, 2020$2,744 $(18,319)$(15,575)
Other comprehensive (loss) income before reclassifications, net of tax(581)4,575 3,994 
Amounts reclassified from accumulated other comprehensive income, net of tax— 2,178 2,178 
Net other comprehensive (loss) income(581)6,753 6,172 
Balance at September 30, 2021$2,163 $(11,566)$(9,403)


Net Unrealized Gain (Loss) on Available for Sale SecuritiesNet Unrealized Gain (Loss) on Interest Rate SwapsTotal
(In thousands)
Balance at December 31, 2019$928 $(8,444)$(7,516)
Other comprehensive income (loss) before reclassifications, net of tax2,072 (13,643)(11,571)
Amounts reclassified from accumulated other comprehensive income, net of tax— 897 897 
Net other comprehensive income (loss)2,072 (12,746)(10,674)
Balance at September 30, 2020$3,000 $(21,190)$(18,190)

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The following table provides information for the items reclassified from accumulated other comprehensive income or loss:

Accumulated Other Comprehensive Income ComponentsThree Months Ended September 30,Nine Months Ended September 30,Associated Line Item in the Consolidated Statements of Income
2021202020212020
(In thousands)
Derivatives:
Unrealized losses on derivatives$(921)$(821)$(2,796)$(1,154)Interest expense on borrowings
Tax benefit206 179 618 257 Income tax expense
Net of tax$(715)$(642)$(2,178)$(897)

6. Earnings per share ("EPS")

Unvested restricted stock awards that contain non-forfeitable rights to dividends are participating securities and are included in the computation of EPS pursuant to the two-class method. The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. The Company’s unvested restricted stock awards qualify as participating securities.

Net income is allocated between the common stock and participating securities pursuant to the two-class method. Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period, excluding participating unvested restricted stock awards.

Diluted EPS is computed in a similar manner, except that the denominator includes the number of additional common shares that would have been outstanding if potentially dilutive common shares were issued using the treasury stock method.

The following table is a reconciliation of earnings available to common shareholders and basic weighted average common shares outstanding to diluted weighted average common shares outstanding, reflecting the application of the two-class method:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2021202020212020
(In thousands, except per share data)
Net income$6,855 $2,991 $18,772 $5,568 
Dividends to participating securities(1)
(27)(19)(71)(52)
Undistributed earnings allocated to participating securities(1)
(104)(32)(292)(34)
Net income for earnings per share calculation$6,724 $2,940 $18,409 $5,482 
Weighted average shares outstanding, basic7,678 7,721 7,722 7,729 
Effect of dilutive equity-based awards(2)
61 — 58 20 
Weighted average shares outstanding, diluted7,739 7,721 7,780 7,749 
Net earnings per common share:
Basic earnings per common share$0.88 $0.38 $2.38 $0.71 
Diluted earnings per common share$0.87 $0.38 $2.37 $0.71 
Awards excluded from the calculation of diluted EPS(3):
Stock options— 15 — — 
(1)    Represents dividends paid and undistributed earnings allocated to unvested stock-based awards that contain non-forfeitable rights to dividends.
(2)    Represents the effect of the assumed exercise of stock options and the vesting of restricted shares, as applicable, utilizing the treasury stock method.
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(3)    Represents stock-based awards not included in the computation of potential common shares for purposes of calculating diluted EPS as the exercise prices were greater than the average market price of the Company's common stock, and, therefore, are considered anti-dilutive.

7. Regulatory Matters

The Federal Reserve, the FDIC and the other federal and state bank regulatory agencies establish regulatory capital guidelines for U.S. banking organizations.

As of January 1, 2015, the Company and the Bank became subject to new capital rules set forth by the Federal Reserve, the FDIC and the other federal and state bank regulatory agencies. The capital rules revise the banking agencies’ leverage and risk-based capital requirements and the method for calculating risk weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act (the Basel III Capital Rules).

The Basel III Capital Rules establish a minimum Common Equity Tier 1 capital requirement of 4.5% of risk-weighted assets; set the minimum leverage ratio at 4.0% of total assets; increased the minimum Tier 1 capital to risk-weighted assets requirement from 4.0% to 6.0%; and retained the minimum total capital to risk weighted assets requirement at 8.0%. A “well-capitalized” institution must generally maintain capital ratios 100-200 basis points higher than the minimum guidelines.

The Basel III Capital Rules also change the risk weights assigned to certain assets. The Basel III Capital Rules assigned a higher risk weight (150%) to loans that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The Basel III Capital Rules also alter the risk weighting for other assets, including marketable equity securities that are risk weighted generally at 300%. The Basel III Capital Rules require certain components of accumulated other comprehensive income (loss) to be included for purposes of calculating regulatory capital requirements unless a one-time opt-out is exercised. The Bank did exercise its opt-out option and excludes the unrealized gain (loss) on investment securities component of accumulated other comprehensive income (loss) from regulatory capital.

The Basel III Capital Rules limit a banking organization’s capital distributions and certain discretionary bonus payments to executive officers if the banking organization does not hold a “capital conservation buffer” of 2.5% in addition to the minimum risk based capital requirement.

Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.

As of September 30, 2021, the Bank and Company met all capital adequacy requirements to which they are subject. There are no conditions or events since then that management believes have changed this conclusion.

The capital amounts and ratios for the Bank and the Company at September 30, 2021 and December 31, 2020 were as follows:
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Minimum Regulatory Capital Required for Capital Adequacy plus Capital Conservation BufferMinimum Regulatory Capital to be Well Capitalized Under Prompt Corrective Action Provisions
Actual Capital
(Dollars in thousands)AmountRatioAmountRatioAmountRatio
Bankwell Bank
September 30, 2021
Common Equity Tier 1 Capital to Risk-Weighted Assets$213,091 10.59 %$140,789 7.00 %$130,733 6.50 %
Total Capital to Risk-Weighted Assets230,049 11.44 %211,184 10.50 %201,127 10.00 %
Tier I Capital to Risk-Weighted Assets213,091 10.59 %170,958 8.50 %160,902 8.00 %
Tier I Capital to Average Assets213,091 9.61 %88,680 4.00 %110,850 5.00 %
Bankwell Financial Group, Inc.
September 30, 2021
Common Equity Tier 1 Capital to Risk-Weighted Assets$202,394 10.02 %$141,344 7.00 %N/AN/A
Total Capital to Risk-Weighted Assets231,878 11.48 %212,016 10.50 %N/AN/A
Tier I Capital to Risk-Weighted Assets202,394 10.02 %171,632 8.50 %N/AN/A
Tier I Capital to Average Assets202,394 9.12 %88,813 4.00 %N/AN/A

Minimum Regulatory Capital Required for Capital Adequacy plus Capital Conservation BufferMinimum Regulatory Capital to be Well Capitalized Under Prompt Corrective Action Provisions
Actual Capital
(Dollars in thousands)AmountRatioAmountRatioAmountRatio
Bankwell Bank
December 31, 2020
Common Equity Tier 1 Capital to Risk-Weighted Assets$191,579 11.06 %$121,216 7.00 %$112,558 6.50 %
Total Capital to Risk-Weighted Assets212,588 12.28 %181,825 10.50 %173,166 10.00 %
Tier I Capital to Risk-Weighted Assets191,579 11.06 %147,191 8.50 %138,533 8.00 %
Tier I Capital to Average Assets191,579 8.44 %90,836 4.00 %113,545 5.00 %
Bankwell Financial Group, Inc.
December 31, 2020
Common Equity Tier 1 Capital to Risk-Weighted Assets$189,529 10.93 %$121,408 7.00 %N/AN/A
Total Capital to Risk-Weighted Assets230,696 13.30 %182,111 10.50 %N/AN/A
Tier I Capital to Risk-Weighted Assets189,529 10.93 %147,423 8.50 %N/AN/A
Tier I Capital to Average Assets189,529 8.34 %90,916 4.00 %N/AN/A









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Regulatory Restrictions on Dividends

The ability of the Company to pay dividends depends, in part, on the ability of the Bank to pay dividends to the Company. In accordance with Connecticut statutes, regulatory approval is required to pay dividends in excess of the Bank’s profits retained in the current year plus retained profits from the previous two years. The Bank is also prohibited from paying dividends that would reduce its capital ratios below minimum regulatory requirements.

Reserve Requirements on Cash

The Bank was not required to maintain a minimum reserve balance in the Federal Reserve Bank (FRB) at September 30, 2021 or December 31, 2020 as the FRB has waived this requirement due to the COVID-19 pandemic.

8. Deposits

At September 30, 2021 and December 31, 2020, deposits consisted of the following:
September 30, 2021December 31, 2020
(In thousands)
Noninterest bearing demand deposit accounts$338,705 $270,235 
Interest bearing accounts:
NOW103,180 101,737 
Money market835,210 669,364 
Savings188,581 158,750 
Time certificates of deposit417,147 627,230 
Total interest bearing accounts1,544,118 1,557,081 
Total deposits$1,882,823 $1,827,316 
Maturities of time certificates of deposit as of September 30, 2021 and December 31, 2020 are summarized below:
September 30, 2021December 31, 2020
(In thousands)
2021$109,663 $418,117 
2022105,610 50,425 
2023150,119 128,495 
202451,722 30,160 
202533 33 
Total$417,147 $627,230 
The aggregate amount of individual certificate accounts, including brokered deposits with balances of $250,000 or more, was approximately $262.8 million at September 30, 2021 and $353.7 million at December 31, 2020.
Brokered certificates of deposits totaled $200.1 million at September 30, 2021 and $238.9 million at December 31, 2020. There were no certificates of deposits from national listing services at September 30, 2021. Certificates of deposits from national listing services totaled $18.4 million at December 31, 2020. Brokered money market accounts totaled $104.0 million at September 30, 2021 and $13.5 million at December 31, 2020.
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The following table summarizes interest expense on deposits by account type for the three and nine months ended September 30, 2021 and 2020:
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
(In thousands)
NOW$51 $40 $148 $99 
Money market1,053 859 2,944 3,213 
Savings96 237 313 1,204 
Time certificates of deposits1,187 2,968 4,840 10,107 
Total interest expense on deposits$2,387 $4,104 $8,245 $14,623 


9. Stock-Based Compensation

Equity award plans

The Company has stock options or unvested restricted stock outstanding under three equity award plans, which are collectively referred to as the “Plan”. The current plan under which any future issuances of equity awards will be made is the 2012 BNC Financial Group, Inc. Stock Plan, or the “2012 Plan,” as amended from time-to-time. All equity awards made under the 2012 Plan are made by means of an award agreement, which contains the specific terms and conditions of the grant. To date, all equity awards have been in the form of stock options or restricted stock. At September 30, 2021, there were 561,901 shares reserved for future issuance under the 2012 Plan.

Stock Options: The Company accounts for stock options based on the fair value at the date of grant and records an expense over the vesting period of such awards on a straight line basis.

There were no options granted during the nine months ended September 30, 2021.

A summary of the status of outstanding stock options for the nine months ended September 30, 2021 is presented below:
Nine Months Ended September 30, 2021
Number of SharesWeighted Average Exercise Price
Options outstanding at beginning of period15,180 $16.82 
Exercised(3,500)15.00 
Options outstanding at end of period11,680 17.37 
Options exercisable at end of period11,680 17.37 

Intrinsic value is the amount by which the fair value of the underlying stock exceeds the exercise price of an option on the exercise date. The total intrinsic value of share options exercised during the nine months ended September 30, 2021 was $19 thousand.

The range of exercise prices for the 11,680 options exercisable at September 30, 2021 was $15.00 to $17.86 per share. The weighted average remaining contractual life for these options was 1.4 years at September 30, 2021. At September 30, 2021, as all awarded options have vested, all of the outstanding options are exercisable, and the aggregate intrinsic value of these options was $138 thousand.

Restricted Stock: Restricted stock provides grantees with rights to shares of common stock upon completion of a service period. Shares of unvested restricted stock are considered participating securities. Restricted stock awards generally vest over one to five years.

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The following table presents the activity for restricted stock for the nine months ended September 30, 2021:
Nine Months Ended September 30, 2021
Number of SharesWeighted Average Grant Date Fair Value
Unvested at beginning of period163,369 
(1)
$26.22 
Granted51,628 
(2)
18.97 
Vested(36,050)27.39 
Forfeited(150)33.02 
Unvested at end of period178,797 23.88 
(1)    Includes 15,099 shares of performance based restricted stock
(2)    Includes 17,563 shares of performance based restricted stock

The total fair value of restricted stock awards vested during the nine months ended September 30, 2021 was $0.8 million.

The Company's restricted stock expense for the nine months ended September 30, 2021 and September 30, 2020 was $1.4 million and $1.3 million, respectively. At September 30, 2021, there was $3.0 million of unrecognized stock compensation expense for restricted stock, expected to be recognized over a weighted average period of 1.7 years.

Performance Based Restricted Stock: The Company has 32,662 shares of performance based restricted stock outstanding as of September 30, 2021 pursuant to the Company’s 2012 Stock Plan. The awards vest over a three to four year service period, provided certain performance metrics are met. The share quantity that ultimately vests can range between 0% and 200%, which is dependent on the degree to which the performance metrics are met. The Company records an expense over the vesting period based on (a) the probability that the performance metric will be met and (b) the fair market value of the Company’s stock at the date of the grant.

10. Derivative Instruments

The Company manages economic risks, including interest rate, liquidity, and credit risk, by managing the amount, sources, and duration of its funding along with the use of interest rate derivative financial instruments, namely interest rate swaps. The Company does not use derivatives for speculative purposes. As of September 30, 2021, the Company was a party to eight interest rate swaps, designated as hedging instruments, to add stability to interest expense and to manage its exposure to the variability of the future cash flows attributable to the contractually specified interest rates. The notional amount for each swap is $25 million and in each case, the Company has entered into pay-fixed interest rate swaps to convert rolling 90 days Federal Home Loan Bank advances or brokered deposits. As of September 30, 2021, the Company entered into four interest rate swaps not designated as hedging instruments, to minimize interest rate risk exposure with loans to customers.

The Company accounts for all non-borrower related interest rate swaps as effective cash flow hedges. None of the interest rate swap agreements contain any credit risk related contingent features. A hedging instrument is expected at inception to be highly effective at offsetting changes in the hedged transactions attributable to the changes in the hedged risk.

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain loan customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. 

Interest rate swaps with a positive fair value are recorded as other assets and interest rate swaps with a negative fair value are recorded as other liabilities on the Consolidated Balance Sheets.

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Information about derivative instruments at September 30, 2021 and December 31, 2020 is as follows:


As of September 30, 2021
Derivative AssetsDerivative Liabilities
Notional AmountBalance Sheet LocationFair ValueNotional AmountBalance Sheet LocationFair Value
(In thousands)
Derivatives designated as hedging instruments:
Interest rate swaps$50,000 Other assets$405 $150,000 Accrued expenses and other liabilities$(15,301)
Derivatives not designated as hedging instruments:
Interest rate swaps(1)
$38,500 Other assets$2,512 $38,500 Accrued expenses and other liabilities$(2,512)

(1) Represents interest rate swaps with commercial banking customers, which are offset by derivatives with a third party.

Accrued interest payable related to interest rate swaps as of September 30, 2021 totaled $0.6 million and is excluded from the fair value presented in the table above. The fair value of interest rate swaps in a net liability position, including accrued interest, totaled $15.5 million as of September 30, 2021.


As of December 31, 2020
Derivative AssetsDerivative Liabilities
Notional AmountBalance Sheet LocationFair ValueNotional AmountBalance Sheet LocationFair Value
(In thousands)
Derivatives designated as hedging instruments:
Interest rate swaps$— Other assets$— $225,000 Accrued expenses and other liabilities$(23,567)
Derivatives not designated as hedging instruments:
Interest rate swaps(1)
$38,500 Other assets$4,444 $38,500 Accrued expenses and other liabilities$(4,444)

(1) Represents interest rate swaps with commercial banking customers, which are offset by derivatives with a third party.

Accrued interest payable related to interest rate swaps as of December 31, 2020 totaled $0.6 million and is excluded from the fair value presented in the table above. The fair value of interest rate swaps in a net liability position, including accrued interest, totaled $24.2 million as of December 31, 2020.
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The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. The Company expects to reclassify $3.6 million to interest expense during the next 12 months.
The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction. The Company does not offset derivative assets and derivative liabilities for financial statement presentation purposes.
Changes in the consolidated statements of comprehensive income (loss) related to interest rate derivatives designated as hedges of cash flows were as follows for the three and nine months ended September 30, 2021 and September 30, 2020:
Three Months Ended September 30,Nine Months Ended September 30,
(In thousands)2021202020212020
Interest rate swaps designated as cash flow hedges:
Unrealized gain (loss) recognized in accumulated other comprehensive income before reclassifications$515 $1,249 $5,875 $(17,554)
Amounts reclassified from accumulated other comprehensive income921 821 2,796 1,154 
Income tax (expense) benefit on items recognized in accumulated other comprehensive income(321)(451)(1,918)3,654 
Other comprehensive income (loss)$1,115 $1,619 $6,753 $(12,746)

The above unrealized gains and losses are reflective of market interest rates as of the respective balance sheet dates. Generally, a lower interest rate environment will result in a negative impact to comprehensive income whereas a higher interest rate environment will result in a positive impact to comprehensive income.

The following tables summarize gross and net information about derivative instruments that are offset in the Consolidated Balance Sheets at September 30, 2021 and December 31, 2020:
September 30, 2021
(In thousands)
Gross Amounts Not Offset in the Consolidated Balance Sheets
Gross Amounts of Recognized Assets(1)
Gross Amounts Offset in the Statement of Financial PositionNet Amounts of Assets presented in the Statement of Financial PositionFinancial InstrumentsCash Collateral ReceivedNet Amount
Derivative Assets$2,893 $— $2,893 $— $— $2,893 
(1) Includes accrued interest payable totaling $24 thousand.
September 30, 2021
(In thousands)
Gross Amounts Not Offset in the Consolidated Balance Sheets
Gross Amounts of Recognized Liabilities(1)
Gross Amounts Offset in the Statement of Financial PositionNet Amounts of Liabilities presented in the Statement of Financial PositionFinancial InstrumentsCash Collateral PostedNet Amount
Derivative Liabilities$18,375 $— $18,375 $— $17,440 $935 
(1) Includes accrued interest payable totaling $562 thousand.
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December 31, 2020
(In thousands)
Gross Amounts Not Offset in the Consolidated Balance Sheets
Gross Amounts of Recognized Assets(1)
Gross Amounts Offset in the Statement of Financial PositionNet Amounts of Assets presented in the Statement of Financial PositionFinancial InstrumentsCash Collateral ReceivedNet Amount
Derivative Assets$4,484 $— $4,484 $— $— $4,484 
(1) Includes accrued interest receivable totaling $40 thousand.
December 31, 2020
(In thousands)
Gross Amounts Not Offset in the Consolidated Balance Sheets
Gross Amounts of Recognized Liabilities(1)
Gross Amounts Offset in the Statement of Financial PositionNet Amounts of Liabilities presented in the Statement of Financial PositionFinancial InstrumentsCash Collateral PostedNet Amount
Derivative Liabilities$28,673 $— $28,673 $— $28,205 $468 
(1) Includes accrued interest payable totaling $662 thousand.

11. Fair Value of Financial Instruments

GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the Consolidated Balance Sheets, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparisons to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction. The estimated fair value amounts have been measured as of the respective period-ends, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end.

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk.

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The carrying values, fair values and placement in the fair value hierarchy of the Company's financial instruments at September 30, 2021 and December 31, 2020 were as follows:
September 30, 2021
Carrying ValueFair ValueLevel 1Level 2Level 3
(In thousands)
Financial Assets:
Cash and due from banks$169,417 $169,417 $169,417 $— $— 
Federal funds sold8,097 8,097 8,097 — — 
Marketable equity securities2,185 2,185 2,185 — — 
Available for sale securities87,565 87,565 20,568 66,997 — 
Held to maturity securities16,107 18,360 — 57 18,303 
Loans receivable, net1,805,217 1,792,793 — — 1,792,793 
Accrued interest receivable6,911 6,911 — 6,911 — 
FHLB stock3,632 3,632 — 3,632 — 
Servicing asset, net of valuation allowance813 813 — — 813 
Derivative asset2,917 2,917 — 2,917 — 
Assets held for sale2,613 2,613 — — 2,613 
Financial Liabilities:
Noninterest bearing deposits$338,705 $338,705 $— $338,705 $— 
NOW and money market938,390 938,390 — 938,390 — 
Savings188,581 188,581 — 188,581 — 
Time deposits417,147 418,703 — — 418,703 
Accrued interest payable933 933 — 933 — 
Advances from the FHLB80,000 79,998 — — 79,998 
Subordinated debentures15,500 15,500 — — 15,500 
Servicing liability13 13 — — 13 
Derivative liability17,813 17,813 — 17,813 — 
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December 31, 2020
Carrying ValueFair ValueLevel 1Level 2Level 3
(In thousands)
Financial Assets:
Cash and due from banks$405,340 $405,340 $405,340 $— $— 
Federal funds sold4,258 4,258 4,258 — — 
Marketable equity securities2,207 2,207 2,207 — — 
Available for sale securities88,605 88,605 10,148 78,457 — 
Held to maturity securities16,078 20,032 — 70 19,962 
Loans receivable, net1,601,672 1,605,402 — — 1,605,402 
Accrued interest receivable6,579 6,579 — 6,579 — 
FHLB stock7,860 7,860 — 7,860 — 
Servicing asset, net of valuation allowance628 628 — — 628 
Derivative asset4,444 4,444 — 4,444 — 
Assets held for sale2,613 2,613 — — 2,613 
Financial Liabilities:
Noninterest bearing deposits$270,235 $270,235 $— $270,235 $— 
NOW and money market771,101 771,101 — 771,101 — 
Savings158,750 158,750 — 158,750 — 
Time deposits627,230 631,891 — — 631,891 
Accrued interest payable1,750 1,750 — 1,750 — 
Advances from the FHLB175,000 174,997 — — 174,997 
Subordinated debentures25,258 25,447 — — 25,447 
Servicing liability21 21 — — 21 
Derivative liability28,011 28,011 — 28,011 — 
The following methods and assumptions were used by management in estimating the fair value of its financial instruments:

Cash and due from banks, federal funds sold, accrued interest receivable and accrued interest payable: The carrying amount is a reasonable estimate of fair value.

Marketable equity securities, available for sale securities and held to maturity securities: Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. The majority of the available for sale securities are considered to be Level 2 as other observable inputs are utilized, such as quoted prices for similar securities. Level 1 investment securities include investments in U.S. treasury notes and in marketable equity securities for which a quoted price is readily available in the market. Level 3 held to maturity securities represent private placement municipal housing authority bonds for which no quoted market price is available. The fair value for these securities is estimated using a discounted cash flow model, using discount rates ranging from 3.3% to 4.7% as of September 30, 2021 and 2.9% to 3.3% as of December 31, 2020. These securities are CRA eligible investments.

FHLB stock: The carrying value of FHLB stock approximates fair value based on the most recent redemption provisions of the FHLB.

Loans receivable: For variable rate loans which reprice frequently and have no significant change in credit risk, fair values are based on carrying values. The fair value of fixed rate loans are estimated by discounting the future cash flows using the rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value methodology includes prepayment, default and loss severity assumptions applied by the type of loan. The fair value estimate of the loans includes an expected credit loss.

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Derivative asset (liability): The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company also considers the creditworthiness of each counterparty for assets and the creditworthiness of the Company for liabilities.

Assets held for sale: Assets held for sale (excluding loans) consist of real estate properties that are expected to sell within a year. The assets are reported at the lower of the carrying amount or fair value less costs to sell. The fair value represents the price that would be received to sell the asset (the exit price).

Servicing asset (liability): Servicing assets and liabilities do not trade in an active, open market with readily observable prices. The Company estimates the fair value of servicing assets and liabilities using discounted cash flow models, incorporating numerous assumptions from the perspective of a market participant, including market discount rates.

Deposits: The fair value of demand deposits, regular savings and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit and other time deposits is estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities to a schedule of aggregated expected maturities on such deposits.

Borrowings and Subordinated Debentures: The fair value of the Company’s borrowings and subordinated debentures is estimated using a discounted cash flow calculation that applies discount rates currently offered based on similar maturities. The Company also considers its own creditworthiness in determining the fair value of its borrowings and subordinated debt. Contractual cash flows for the subordinated debt are reduced based on the estimated rates of default, the severity of losses to be incurred on a default, and the rates at which the subordinated debt is expected to prepay after the call date.

Off-balance-sheet instruments: Loan commitments on which the committed interest rate is less than the current market rate are insignificant at September 30, 2021 and December 31, 2020.

12. Fair Value Measurements

The Company is required to account for certain assets at fair value on a recurring or non-recurring basis. The Company determines fair value in accordance with GAAP, which defines fair value and establishes a framework for measuring fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:

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

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

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

Valuation techniques based on unobservable inputs are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows and the selection of discount rates that may appropriately reflect market and credit risks. Changes in these judgments often have a material impact on the fair value estimates. In addition, since these estimates are as of a specific point in time they are susceptible to material near-term changes.

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Financial instruments measured at fair value on a recurring basis

The following table details the financial instruments carried at fair value on a recurring basis at September 30, 2021 and December 31, 2020, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value. The Company had no transfers into or out of Levels 1, 2 or 3 during the nine months ended September 30, 2021 and for the year ended December 31, 2020.
Fair Value
(In thousands)Level 1Level 2Level 3
September 30, 2021:
Marketable equity securities$2,185 $— $— 
Available for sale investment securities:
U.S. Government and agency obligations20,568 52,925 — 
Corporate bonds— 14,072 — 
Derivative asset— 2,917 — 
Derivative liability— 17,813 — 
December 31, 2020:
Marketable equity securities$2,207 $— $— 
Available for sale investment securities:
U.S. Government and agency obligations10,148 66,730 — 
Corporate bonds— 11,727 — 
Derivative asset— 4,444 — 
Derivative liability— 28,011 — 

Marketable equity securities and available for sale investment securities: The fair value of the Company’s investment securities is estimated by using pricing models or quoted prices of securities with similar characteristics (i.e., matrix pricing) and is classified within Level 1 or Level 2 of the valuation hierarchy. The pricing is primarily sourced from third-party pricing services overseen by management.

Derivative assets and liabilities: The Company’s derivative assets and liabilities consist of transactions as part of management’s strategy to manage interest rate risk. The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company has determined that the majority of the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy.

Financial instruments measured at fair value on a nonrecurring basis

Certain assets and liabilities are measured at fair value on a non-recurring basis in accordance with GAAP. These include assets that are measured at the lower-of-cost-or-market that were recognized at fair value below cost at the end of the period as well as assets that are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.

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The following table details the financial instruments measured at fair value on a nonrecurring basis at September 30, 2021 and December 31, 2020, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:
Fair Value
(In thousands)Level 1Level 2Level 3
September 30, 2021:
Impaired loans$— $— $47,162 
Servicing asset, net— — 800 
December 31, 2020:
Impaired loans$— $— $42,661 
Servicing asset, net— — 607 
Assets held for sale— — 2,613 

The following table presents information about quantitative inputs and assumptions for Level 3 financial instruments carried at fair value on a nonrecurring basis at September 30, 2021 and December 31, 2020:
Fair ValueValuation MethodologyUnobservable InputRange
(Dollars in thousands)
September 30, 2021:
Impaired loans$21,602 AppraisalsDiscount to appraised value
8.00%
25,560 Discounted cash flowsDiscount rate
3.00 - 6.75%
$47,162 
Servicing asset, net$800 Discounted cash flowsDiscount rate
10.00%(1)
Prepayment rate
3.00 - 17.00%
December 31, 2020:
Impaired loans$20,703 AppraisalsDiscount to appraised value
8.00 - 33.00%
21,958 Discounted cash flowsDiscount rate
3.00 - 12.00%
$42,661 
Servicing asset, net$607 Discounted cash flowsDiscount rate
10.00%(2)
Prepayment rate
3.00 - 16.00%
Assets held for sale$2,613 Sale & income
approach		Adjustment to
valuation and cost
to sell		N/A
(1) Servicing liabilities totaling $13 thousand were valued using a discount rate of 0.4%.
(2) Servicing liabilities totaling $21 thousand were valued using a discount rate of 0.2%.

Impaired loans: Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral-dependent loans calculated in accordance with ASC 310-10 when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. Collateral is typically valued using appraisals
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or other indications of value based on recent comparable sales of similar properties or other assumptions. Estimates of fair value based on collateral are generally based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3. For those loans where the primary source of repayment is cash flow from operations, adjustments include impairment amounts calculated based on the perceived collectability of interest payments on the basis of a discounted cash flow analysis utilizing a discount rate equivalent to the original note rate.

Servicing assets and liabilities: When loans are sold, on a servicing retained basis, servicing rights are initially recorded at fair value. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized. The fair value of servicing assets and liabilities are not measured on an ongoing basis but are subject to fair value adjustments when and if the assets or liabilities are deemed to be impaired.

Assets held for sale: Assets held for sale (excluding loans) consist of real estate properties that are expected to sell within a year. The assets are reported at the lower of the carrying amount or fair value less costs to sell. The fair value represents the price that would be received to sell the asset (the exit price).

13. Subordinated debentures

On August 19, 2015, the Company completed a private placement of $25.5 million in aggregate principal amount of fixed rate subordinated notes (the “2015 Notes”) to certain institutional investors. The 2015 Notes are non-callable for five years, have a stated maturity of August 15, 2025, and bear interest at a quarterly pay fixed rate of 5.75% per annum to the maturity date. The 2015 Notes became callable, in part or in whole, beginning August 2020. On May 15, 2021, the Company repaid $10.0 million of the 2015 Notes.

The 2015 Notes have been structured to qualify for the Company as Tier 2 capital under regulatory guidelines. The net proceeds were used for general corporate purposes, which included maintaining liquidity at the holding company, providing equity capital to the Bank to fund balance sheet growth and the Company's working capital needs. In the third quarter of 2021, the 2015 Notes investment grade rating of BBB- was reaffirmed by Kroll Bond Rating Agency.

The Company recognized $0.2 million and $0.4 million in interest expense related to its subordinated debt for the three month periods ended September 30, 2021 and 2020, respectively. The Company recognized $0.9 million and $1.1 million in interest expense related to its subordinated debt for the nine month periods ended September 30, 2021 and 2020, respectively.

14. Subsequent Events

On October 14, 2021, the Company entered into a Subordinated Note Purchase Agreement with an institutional accredited investor, pursuant to which the Company issued and sold 3.25% fixed-to-floating rate subordinated notes due 2031 (the “2021 Notes”) in the principal amount of $35.0 million. The Company intends to use the net proceeds from the sale of the 2021 Notes for general corporate purposes, including, but not limited to, the repayment of $15.5 million of outstanding subordinated notes.

On October 14, 2021, the Company issued a notice of redemption of the outstanding 2015 Notes. The notice calls for the redemption of the remaining $15.5 million aggregate principal amount of the 2015 Notes on November 15, 2021. The redemption price for the 2015 Notes is 100% of the principal amount redeemed, plus accrued and unpaid interest to, but not including, the redemption date.

On October 27, 2021, the Company’s Board of Directors declared an $0.18 per share cash dividend, payable on November 22, 2021 to shareholders of record on November 12, 2021. In addition, the Company's Board of Directors authorized the repurchase of an additional 200,000 shares under its existing share repurchase program.
    



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

This section presents management’s perspective on our financial condition and results of operations. The following discussion and analysis should be read in conjunction with the unaudited interim consolidated financial statements and related notes contained elsewhere in this report on Form 10-Q. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the Company’s Form 10-K filed for the year ended December 31, 2020 in the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.” We assume no obligation to update any of these forward-looking statements.

General

Bankwell Financial Group, Inc. is a bank holding company headquartered in New Canaan, Connecticut. Through our wholly owned subsidiary, Bankwell Bank, or the Bank, we serve small and medium-sized businesses and retail customers. We have a history of building long-term customer relationships and attracting new customers through what we believe is our strong customer service and our ability to deliver a diverse product offering.

The following discussion and analysis presents our results of operations and financial condition on a consolidated basis. However, because we conduct all of our material business operations through the Bank, the discussion and analysis relates to activities primarily conducted at the Bank.

We generate most of our revenue from interest on loans and investments and fee-based revenues. Our primary source of funding for our loans is deposits. Our largest expenses are interest on deposits and salaries and related employee benefits. We measure our performance primarily through our net interest margin, efficiency ratio, ratio of allowance for loan losses to total loans, return on average assets and return on average equity, among other metrics, while maintaining appropriate regulatory leverage and risk-based capital ratios.

Executive Overview

We are focused on being the banking provider of choice and to serve as an alternative to our larger competitors. We aim to do this through:

•Responsive, customer-centric products and services and a community focus;

•Organic growth and strategic acquisitions when market opportunities present themselves;

•Utilization of efficient and scalable infrastructure; and

•Disciplined focus on risk management.

Impact of COVID-19

The COVID-19 pandemic has resulted in significant economic disruption affecting our business and the clients we serve. As vaccination efforts continue, restrictions on businesses have been lifted and a return to more normal economic activity has begun. However, a significant degree of uncertainty still exists concerning the ultimate duration and magnitude of the COVID-19 pandemic and subsequent outbreaks, including whether restrictions that have been lifted will need to be imposed again or tightened in the future. Given the ongoing and dynamic nature of the circumstances, it is still difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, including but not limited to the continued roll-out of vaccinations, which play an important role as to when the coronavirus can be controlled and abated.

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Critical Accounting Policies and Estimates

The discussion and analysis of our results of operations and financial condition are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires us to make significant estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from our current estimates, as a result of changing conditions and future events. We believe that accounting estimates related to the measurement of the allowance for loan losses, the valuation of derivative instruments, investment securities and deferred income taxes, and the evaluation of investment securities for other than temporary impairment are particularly critical and susceptible to significant near-term change.

Earnings and Performance Overview

For the three months ended September 30, 2021, we had net interest income of $17.7 million, an increase of $4.1 million or 30.2% when compared to the same period in 2020. For the nine months ended September 30, 2021, we had net interest income of $49.0 million, an increase of $8.4 million, or 20.8% when compared to the same period in 2020. The increase in net interest income for the three and nine months ended September 30, 2021 was primarily due to lower interest expense on deposits and an increase in interest and fees on loans due to loan growth when compared to the same periods in 2020.

Noninterest income increased $0.8 million to $1.4 million for the three months ended September 30, 2021 compared to the same period in 2020. Noninterest income increased $2.6 million to $4.8 million for the nine months ended September 30, 2021 compared to the same period in 2020. The increase in noninterest income was primarily a result of the resumption of loan sales.

In the fourth quarter of 2020, the Company recognized a $3.9 million one-time charge recorded in noninterest expense for office consolidation, vendor contract termination and employee severance costs. As of September 30, 2021, the Company has paid a total of $0.7 million in employee severance costs and a total of $1.1 million in vendor contract termination costs. Reference the 2020 Form 10-K for further discussion on these charges.

Net income available to common shareholders was $6.9 million, or $0.87 per diluted share, and $3.0 million, or $0.38 per diluted share, for the three months ended September 30, 2021 and 2020, respectively. Net income available to common shareholders was $18.8 million, or $2.37 per diluted share, and $5.6 million, or $0.71 per diluted share, for the nine months ended September 30, 2021 and 2020, respectively. The increase in net income was primarily impacted by the aforementioned increases in net interest income and noninterest income and a decrease in the provision for loan losses resulting from lower loan loss reserves in 2021 when compared to 2020, which saw a large increase in reserves due to the COVID-19 pandemic.

Returns on average stockholders' equity and average assets for the three months ended September 30, 2021 were 14.09% and 1.22%, respectively, compared to 6.87% and 0.55%, respectively, for the three months ended September 30, 2020. Returns on average stockholders' equity and average assets for the nine months ended September 30, 2021 were 13.29% and 1.12%, respectively, compared to 4.23% and 0.36%, respectively, for the nine months ended September 30, 2020.

Results of Operations

Net Interest Income

Net interest income is the difference between interest earned on loans and securities and interest paid on deposits and other borrowings, and is the primary source of our operating income. Net interest income is affected by the level of interest rates, changes in interest rates and changes in the amount and composition of interest earning assets and interest bearing liabilities. Included in interest income are certain loan fees, such as deferred origination fees and late charges. We convert tax-exempt income to a fully taxable equivalent ("FTE") basis using the statutory federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit. The average balances are principally daily averages. Interest income on loans includes the effect of deferred loan fees and costs accounted for as yield adjustments. Premium amortization and discount accretion are included in the respective interest income and interest expense amounts.

FTE net interest income for the three months ended September 30, 2021 and 2020 was $17.8 million and $13.7 million, respectively. FTE net interest income for the nine months ended September 30, 2021 and 2020 was $49.1 million and $40.7 million, respectively.

FTE interest income for the three months ended September 30, 2021 increased by $1.7 million, or 8.9%, to $20.7 million, compared to FTE interest income for the three months ended September 30, 2020. FTE interest income for the nine months
44

ended September 30, 2021 increased by $1.1 million, or 1.9%, to $59.6 million, compared to FTE interest income for the nine months ended September 30, 2020. This increase was due to commercial real estate and commercial business loan growth.

Interest expense for the three months ended September 30, 2021 decreased by $2.4 million, or 45.6%, compared to interest expense for the three months ended September 30, 2020. Interest expense for the nine months ended September 30, 2021 decreased by $7.3 million, or 40.9%, compared to interest expense for the nine months ended September 30, 2020. This decrease is due to lower interest rates on deposits.

The net interest margin increased by 72 basis points to 3.39% for the three months ended September 30, 2021, compared to the three months ended September 30, 2020 and the net interest margin increased by 27 basis points to 3.08% for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. The increase in net interest margin was primarily due to lower interest expense on deposits and a greater percentage of noninterest bearing deposits. In addition, the net interest margin for the three months ended September 30, 2021 was positively impacted by a reduction in excess liquidity when compared to the three months ended September 30, 2020.


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Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential

The following tables present the average balances and yields earned on interest earning assets and average balances and weighted average rates paid on our funding liabilities for the three and nine months ended September 30, 2021 and 2020.
Three Months Ended September 30,
20212020
(Dollars in thousands)Average BalanceInterest
Yield / Rate (4)
Average BalanceInterest
Yield / Rate (4)
Assets:
Cash and Fed funds sold$209,500 $88 0.17 %$312,078 $96 0.12 %
Securities (1)
105,030 766 2.92 96,448 776 3.22 
Loans:
Commercial real estate1,270,375 14,345 4.42 1,087,765 12,570 4.52 
Residential real estate95,100 809 3.40 125,069 1,097 3.51 
Construction88,728 845 3.73 94,984 1,029 4.24 
Commercial business314,484 3,707 4.61 322,066 3,329 4.04 
Consumer8,870 89 3.99 121 2 7.37 
Total loans1,777,557 19,795 4.36 1,630,005 18,027 4.33 
Federal Home Loan Bank stock3,133 16 2.04 7,835 77 3.91 
Total earning assets2,095,220 $20,665 3.86 %2,046,366 $18,976 3.63 %
Other assets131,670 132,617 
Total assets$2,226,890 $2,178,983 
Liabilities and shareholders' equity:
Interest bearing liabilities:
NOW$111,813 $51 0.18 %$87,890 $40 0.18 %
Money market824,203 1,053 0.51 517,638 859 0.66 
Savings182,848 96 0.21 163,135 237 0.58 
Time448,218 1,187 1.05 757,176 2,968 1.56 
Total interest bearing deposits1,567,082 2,387 0.60 1,525,839 4,104 1.07 
Borrowed money72,960 503 2.70 200,237 1,210 2.36 
Total interest bearing liabilities1,640,042 $2,890 0.70 %1,726,076 $5,314 1.22 %
Noninterest bearing deposits341,303 226,473 
Other liabilities52,552 53,272 
Total Liabilities2,033,897 2,005,821 
Shareholders' equity192,993 173,162 
Total liabilities and shareholders' equity$2,226,890 $2,178,983 
Net interest income (2)
$17,775 $13,662 
Interest rate spread3.16 %2.41 %
Net interest margin (3)
3.39 %2.67 %
(1)Average balances and yields for securities are based on amortized cost.
(2)The adjustment for securities and loans taxable equivalency amounted to $51 thousand and $54 thousand for the three months ended September 30, 2021 and 2020, respectively.
(3)Annualized net interest income as a percentage of earning assets.
(4)Yields are calculated using the contractual day count convention for each respective product type.

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Nine Months Ended September 30,
20212020
(Dollars in thousands)Average BalanceInterest
Yield / Rate (4)
Average BalanceInterest
Yield / Rate (4)
Assets:
Cash and Fed funds sold$315,102 $286 0.12 %$207,058 $468 0.30 %
Securities (1)
103,192 2,315 2.99 96,761 2,289 3.15 
Loans:
Commercial real estate1,188,049 40,802 4.53 1,094,956 38,460 4.61 
Residential real estate104,320 2,669 3.41 134,369 3,636 3.61 
Construction97,828 2,769 3.73 98,539 3,350 4.47 
Commercial business302,019 10,495 4.58 289,959 10,017 4.54 
Consumer7,601 226 3.97 130 8 8.15 
Total loans1,699,817 56,961 4.42 1,617,953 55,471 4.50 
Federal Home Loan Bank stock4,608 72 2.09 7,547 272 4.81 
Total earning assets2,122,719 $59,634 3.70 %1,929,319 $58,500 3.98 %
Other assets119,098 125,957 
Total assets$2,241,817 $2,055,276 
Liabilities and shareholders' equity:
Interest bearing liabilities:
NOW$110,637 $148 0.18 %$76,661 $99 0.17 %
Money market781,178 2,944 0.50 473,485 3,213 0.91 
Savings170,749 313 0.24 170,262 1,204 0.94 
Time532,278 4,840 1.22 721,051 10,107 1.87 
Total interest bearing deposits1,594,842 8,245 0.69 1,441,459 14,623 1.36 
Borrowed money108,737 2,280 2.77 187,177 3,187 2.24 
Total interest bearing liabilities1,703,579 $10,525 0.83 %1,628,636 $17,810 1.46 %
Noninterest bearing deposits303,421 201,384 
Other liabilities46,023 49,418 
Total Liabilities2,053,023 1,879,438 
Shareholders' equity188,794 175,838 
Total liabilities and shareholders' equity$2,241,817 $2,055,276 
Net interest income (2)
$49,109 $40,690 
Interest rate spread2.87 %2.52 %
Net interest margin (3)
3.08 %2.81 %
(1)Average balances and yields for securities are based on amortized cost.
(2)The adjustment for securities and loans taxable equivalency amounted to $151 thousand and $159 thousand for the nine months ended September 30, 2021 and 2020, respectively.
(3)Annualized net interest income as a percentage of earning assets.
(4)Yields are calculated using the contractual day count convention for each respective product type.


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Effect of changes in interest rates and volume of average earning assets and average interest bearing liabilities

The following table shows the extent to which changes in interest rates and changes in the volume of average earning assets and average interest bearing liabilities have affected net interest income. For each category of earning assets and interest bearing liabilities, information is provided relating to: changes in volume (changes in average balances multiplied by the prior year’s average interest rates); changes in rates (changes in average interest rates multiplied by the prior year’s average balances); and the total change. Changes attributable to both volume and rate have been allocated proportionately based on the relationship of the absolute dollar amount of change in each.
Three Months Ended September 30, 2021 vs 2020
Increase (Decrease)		Nine Months Ended September 30, 2021 vs 2020
Increase (Decrease)
(In thousands)VolumeRateTotalVolumeRateTotal
Interest and dividend income:
Cash and Fed funds sold$(37)$29 $(8)$176 $(358)$(182)
Securities66 (76)(10)148 (122)26 
Loans:
Commercial real estate2,067 (292)1,775 3,220 (878)2,342 
Residential real estate(256)(32)(288)(777)(190)(967)
Construction(65)(119)(184)(24)(557)(581)
Commercial business(80)458 378 420 58 478 
Consumer88 (1)87 224 (6)218 
Total loans1,754 14 1,768 3,063 (1,573)1,490 
Federal Home Loan Bank stock(34)(27)(61)(82)(118)(200)
Total change in interest and dividend income1,749 (60)1,689 3,305 (2,171)1,134 
Interest expense:
Deposits:
NOW11 — 11 46 3 49 
Money market423 (229)194 1,537 (1,806)(269)
Savings26 (167)(141)3 (894)(891)
Time(991)(790)(1,781)(2,250)(3,017)(5,267)
Total deposits(531)(1,186)(1,717)(664)(5,714)(6,378)
Borrowed money(857)150 (707)(1,534)627 (907)
Total change in interest expense(1,388)(1,036)(2,424)(2,198)(5,087)(7,285)
Change in net interest income$3,137 $976 $4,113 $5,503 $2,916 $8,419 

Provision for Loan Losses

The provision for loan losses is based on management’s periodic assessment of the adequacy of our allowance for loan losses which, in turn, is based on interrelated factors such as the composition of our loan portfolio and its inherent risk characteristics, the level of nonperforming loans and net charge-offs, both current and historic, local economic and credit conditions, the direction of real estate values, and regulatory guidelines. The provision for loan losses is charged against earnings in order to maintain our allowance for loan losses and reflects management’s best estimate of probable losses inherent in our loan portfolio as of the balance sheet date.

The provision for loan losses for the three months ended September 30, 2021 was $0.1 million compared to a provision for loan losses of $0.7 million for the three months ended September 30, 2020. The credit for loan losses for the nine months ended September 30, 2021 was $0.2 million compared to a provision for loan losses of $6.9 million for the nine months ended September 30, 2020. The decrease in the provision for loan losses for the three and nine months ended September 30, 2021 was driven by lower loan loss reserves in 2021 when compared to 2020, which saw a large increase in reserves due to the COVID-19 pandemic.

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Noninterest Income

Noninterest income is a component of our revenue and is comprised primarily of fees generated from deposit relationships with our customers, fees generated from sales and referrals of loans, income earned on bank-owned life insurance and gains on sales of investment securities.

The following tables compare noninterest income for the three and nine months ended September 30, 2021 and 2020:
Three Months Ended
September 30,		Change
(Dollars in thousands)20212020$%
Gains and fees from sales of loans$924 $27 $897 3,322.2 %
Bank-owned life insurance271 242 29 12.0 
Service charges and fees199 190 9 4.7 
Gain on sale of other real estate owned, net— 19 (19)(100.0)
Other43 136 (93)(68.4)
Total noninterest income$1,437 $614 $823 134.0 %

Nine Months Ended
September 30,		Change
(Dollars in thousands)20212020$%
Gains and fees from sales of loans$2,251 $27 $2,224 8,237.0 %
Bank-owned life insurance753 726 27 3.7 
Service charges and fees615 578 37 6.4 
Gain on sale of other real estate owned, net— 19 (19)(100.0)
Other1,213 913 300 32.9 
Total noninterest income$4,832 $2,263 $2,569 113.5 %

Noninterest income increased by $0.8 million to $1.4 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. Noninterest income increased by $2.6 million to $4.8 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

The increase in noninterest income was driven by resumed loan sales, totaling $0.9 million and $2.3 million for the three and nine months ended September 30, 2021, respectively. In addition, the increase in noninterest income for the nine months ended September 30, 2021 was impacted by a one-time federal payroll tax credit for COVID-19 of $0.9 million, partially offset by $0.4 million of non-recurring interest rate swap fees recognized during the nine months ended September 30, 2020.

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Noninterest Expense

The following tables compare noninterest expense for the three and nine months ended September 30, 2021 and 2020:
Three Months Ended
September 30,		Change
(Dollars in thousands)20212020$%
Salaries and employee benefits$4,782 $5,295 $(513)(9.7)%
Occupancy and equipment2,615 2,266 349 15.4 
Data processing632 529 103 19.5 
Professional services498 374 124 33.2 
Director fees324 301 23 7.6 
FDIC insurance298 176 122 69.3 
Marketing186 151 35 23.2 
Other1,035 637 398 62.5 
Total noninterest expense$10,370 $9,729 $641 6.6 %
Nine Months Ended
September 30,		Change
(Dollars in thousands)20212020$%
Salaries and employee benefits$13,511 $15,902 $(2,391)(15.0)%
Occupancy and equipment8,271 6,410 1,861 29.0 
Data processing1,977 1,558 419 26.9 
Professional services1,632 1,519 113 7.4 
FDIC insurance1,001 529 472 89.2 
Director fees968 883 85 9.6 
Marketing317 512 (195)(38.1)
Other2,383 1,797 586 32.6 
Total noninterest expense$30,060 $29,110 $950 3.3 %

Noninterest expense increased by $0.6 million to $10.4 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The increase in noninterest expense was primarily driven by an increase in occupancy and equipment expense and other expense, partially offset by a decrease in salaries and employee benefits expense.

Noninterest expense increased by $1.0 million to $30.1 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase in noninterest expense was primarily driven by an increase in occupancy and equipment expense, data processing expense, FDIC insurance expense and other expense, partially offset by a decrease in salaries and employee benefits expense.

Occupancy and equipment expense totaled $2.6 million for the quarter ended September 30, 2021, an increase of $0.3 million when compared to the same period in 2020. Occupancy and equipment expense totaled $8.3 million for the nine months ended September 30, 2021, an increase of $1.9 million when compared to the same period in 2020. The increase in occupancy and equipment expense was primarily due to additional one-time charges associated with office consolidation activity (previously disclosed in the fourth quarter of 2020) and an increase in lease expense resulting from the commencement of the lease on the Company's new headquarters building.

Data processing expense totaled $2.0 million for the nine months ended September 30, 2021, an increase of $0.4 million when compared to the same period in 2020. The increase in data processing expense was primarily due to $0.4 million in costs associated with the conversion to a new online banking system implemented in the second quarter of 2021.

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FDIC insurance expense totaled $1.0 million for the nine months ended September 30, 2021, an increase of $0.5 million when compared to the same period in 2020. The increase in FDIC insurance expense was due to the absence of available FDIC insurance credits recognized in the first quarter of 2020 and elevated expense due to liquidity driven balance sheet growth in the first half 2021.

Salaries and employee benefits expense totaled $4.8 million for the quarter ended September 30, 2021, a decrease of $0.5 million when compared to the same period in 2020. Salaries and employee benefits expense totaled $13.5 million for the nine months ended September 30, 2021, a decrease of $2.4 million when compared to the same period in 2020. The decrease in salaries and employee benefits expense was primarily driven by a decrease in full time equivalent employees as a direct result of the Voluntary Early Retirement Incentive Plan offered to eligible employees and other employee actions taken during the fourth quarter of 2020. Full time equivalent employees totaled 134 at September 30, 2021 compared to 142 for the same period in 2020. Average full time equivalent employees totaled 127 for the nine months ended September 30, 2021 compared to 151 for the same period in 2020. In addition, salaries and employee benefits expense also benefited by one-time deferrals of $0.6 million for the nine months ended September 30, 2021 in costs associated with a new online banking and other systems.

Income Taxes

Income tax expense for the three months ended September 30, 2021 and 2020 totaled $1.8 million and $0.8 million, respectively. The effective tax rates for the three months ended September 30, 2021 and 2020 were 20.8% and 20.9%, respectively. Income tax expense for the nine months ended September 30, 2021 and 2020 totaled $5.1 million and $1.2 million, respectively. The effective tax rates for the nine months ended September 30, 2021 and 2020 were 21.5% and 18.0%, respectively. The increase in the effective tax rate for the nine months ended September 30, 2021 was primarily attributable to the absence of a discrete benefit recognized in the first quarter of 2020, and to a lesser extent, other permanent differences. The impact of these items on the effective tax rate varies with changes in pre-tax income.

Financial Condition

Summary

At September 30, 2021 total assets were $2.2 billion, a $27.1 million decrease, or 1.2%, compared to December 31, 2020. The change in assets remained relatively flat as the decrease in excess liquidity was offset by an increase in loans. Gross loans totaled $1.8 billion at September 30, 2021, an increase of $198.9 million compared to December 31, 2020. Excluding PPP loans, gross loans increased by $232.1 million at September 30, 2021 when compared to December 31, 2020. Deposits totaled $1.9 billion at September 30, 2021, compared to $1.8 billion at December 31, 2020.

Total shareholders’ equity at September 30, 2021 and December 31, 2020 was $196.2 million and $176.6 million, respectively. The increase in shareholders' equity was primarily driven by (i) net income of $18.8 million for the nine months ended September 30, 2021 and (ii) a $6.2 million favorable impact to accumulated other comprehensive income driven by fair value marks related to hedge positions involving interest rate swaps. The Company's interest rate swaps are used to hedge interest rate risk. The Company's current interest rate swap positions will cause a decrease to other comprehensive income in a falling interest rate environment and an increase in a rising interest rate environment. The increase in shareholders’ equity was partially offset by dividends paid of $3.6 million and common stock repurchases of $3.2 million.

Loan Portfolio

We originate commercial real estate loans, including construction loans, commercial business loans and other consumer loans. Our loan portfolio is the largest category of our earning assets.

Total loans before deferred loan fees and the allowance for loan losses were $1.82 billion at September 30, 2021 and $1.63 billion at December 31, 2020. Total gross loans increased $198.9 million as of September 30, 2021 compared to the year ended December 31, 2020.

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The following table compares the composition of our loan portfolio for the dates indicated:
(In thousands)At September 30, 2021At December 31, 2020Change
Real estate loans:
Residential$90,110 $113,557 $(23,447)
Commercial1,337,896 1,148,383 189,513 
Construction94,665 87,007 7,658 
1,522,671 1,348,947 173,724 
Commercial business292,825 276,601 16,224 
Consumer9,050 79 8,971 
Total loans$1,824,546 $1,625,627 $198,919 
Asset Quality

We actively manage asset quality through our underwriting practices and collection operations. Our Board of Directors monitors credit risk management. The Directors Loan Committee ("DLC") has primary oversight responsibility for the credit-granting function including approval authority for credit-granting policies, review of management’s credit-granting activities and approval of large exposure credit requests, as well as loan review and problem loan management and resolution. The committee reports the results of its respective oversight functions to our Board of Directors. In addition, our Board of Directors receives information concerning asset quality measurements and trends on a monthly basis. While we continue to adhere to prudent underwriting standards, our loan portfolio is not immune to potential negative consequences as a result of general economic weakness, such as a prolonged downturn in the housing market on a national scale. Decreases in real estate values could adversely affect the value of property used as collateral for loans. In addition, adverse changes in the economy could have a negative effect on the ability of borrowers to make scheduled loan payments, which would likely have an adverse impact on earnings.

The Company has established credit policies applicable to each type of lending activity in which it engages. The Company evaluates the creditworthiness of each customer and extends credit of up to 80% of the market value of the collateral, depending on the borrower's creditworthiness and the type of collateral. The borrower’s ability to service the debt is monitored on an ongoing basis. Real estate is the primary form of collateral. Other important forms of collateral are business assets, time deposits and marketable securities. While collateral provides assurance as a secondary source of repayment, the Company ordinarily requires the primary source of repayment for commercial loans, to be based on the borrower’s ability to generate continuing cash flows. In the fourth quarter of 2017 management made the strategic decision to no longer originate residential mortgage loans. As of the beginning of the third quarter of 2019, the Company no longer offered home equity loans or lines of credit. The Company’s policy for residential lending generally required that the amount of the loan may not exceed 80% of the original appraised value of the property. In certain situations, the amount may have exceeded 80% LTV either with private mortgage insurance being required for that portion of the residential loan in excess of 80% of the appraised value of the property or where secondary financing is provided by a housing authority program second mortgage, a community’s low/moderate income housing program, or a religious or civic organization.

Credit risk management involves a partnership between our relationship managers and our credit approval, portfolio management, credit administration and collections personnel. Disciplined underwriting, portfolio monitoring and early problem recognition are important aspects of maintaining our high credit quality standards and low levels of nonperforming assets since our inception in 2002.

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Nonperforming assets. Nonperforming assets include nonaccrual loans and property acquired through foreclosures or repossession. The following table presents nonperforming assets and additional asset quality data for the dates indicated:
(In thousands)At September 30, 2021At December 31, 2020
Nonaccrual loans:
Real estate loans:
Residential$1,849 $1,492 
Commercial16,314 21,093 
Commercial business1,754 1,834 
Construction8,997 8,997 
Total nonaccrual loans28,914 33,416 
Other real estate owned— — 
Total nonperforming assets$28,914 $33,416 
Nonperforming assets to total assets1.30 %1.48 %
Nonaccrual loans to total gross loans1.58 %2.06 %
Total past due loans to total gross loans1.69 %0.93 %

Nonperforming assets totaled $28.9 million and represented 1.30% of total assets at September 30, 2021, compared to $33.4 million and 1.48% of total assets at December 31, 2020. Nonaccrual loans totaled $28.9 million at September 30, 2021 and $33.4 million at December 31, 2020. The decrease in nonaccrual loans was partially a result of charge-offs primarily consisting of previously reserved commercial real estate exposure. The Bank continues work-out activity on its nonaccrual loan population. There was no other real estate owned at September 30, 2021 or December 31, 2020.
Allowance for Loan Losses

We evaluate the adequacy of the allowance for loan losses at least quarterly, and in determining our allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of our allowance for loan losses is based on internally assigned risk classifications of loans, the Bank’s and peer banks’ historical loss experience, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates.

Our general practice is to identify problem credits early and recognize full or partial charge-offs as promptly as practicable when it is determined that it is probable that the loan will not be repaid according to its original contractual terms, including principal and interest. Full or partial charge-offs on collateral dependent impaired loans are recognized when the collateral is deemed to be insufficient to support the carrying value of the loan. We do not recognize a recovery when an updated appraisal indicates a subsequent increase in value of the collateral.

Our charge-off policies, which comply with standards established by our banking regulators, are consistently applied from period to period. Charge-offs are recorded on a monthly basis, as incurred. Partially charged-off loans continue to be evaluated on a monthly basis and additional charge-offs or loan loss provisions may be recorded on the remaining loan balance based on the same criteria.

53

The following table presents the activity in our allowance for loan losses and related ratios for the dates indicated:
Three Months Ended
September 30,		Nine Months Ended
September 30,
(Dollars in thousands)2021202020212020
Balance at beginning of period$16,672 $19,662 $21,009 $13,509 
Charge-offs:
Commercial real estate— — (3,977)— 
Commercial business— — (51)(7)
Consumer(15)(4)(33)(29)
Total charge-offs(15)(4)(4,061)(36)
Recoveries:
Commercial business11 — 27 1 
Consumer1 2 10 2 
Total recoveries12 2 37 3 
Net charge-offs(3)(2)(4,024)(33)
Provision (credit) charged to earnings134 712 (182)6,896 
Balance at end of period$16,803 $20,372 $16,803 $20,372 
Net charge-offs to average loans— %— %0.24 %— %
Allowance for loan losses to total gross loans0.92 %1.25 %0.92 %1.25 %

At September 30, 2021, our allowance for loan losses was $16.8 million and represented 0.92% of total gross loans, compared to $21.0 million, or 1.29% of total gross loans, at December 31, 2020.

The following table presents the allocation of the allowance for loan losses and the percentage of these loans to total loans for the dates indicated:
At September 30, 2021At December 31, 2020
(Dollars in thousands)AmountPercent of Loan PortfolioAmountPercent of Loan Portfolio
Residential real estate$476 4.94 %$610 6.99 %
Commercial real estate13,246 73.33 16,425 70.64 
Construction142 5.19 221 5.35 
Commercial business2,903 16.05 3,753 17.02 
Consumer36 0.49 — — 
Total allowance for loan losses$16,803 100.00 %$21,009 100.00 %

The allocation of the allowance for loan losses at September 30, 2021 reflects our assessment of credit risk and probable loss within each portfolio. We believe that the level of the allowance for loan losses at September 30, 2021 is appropriate to cover probable losses.

Reserve for Unfunded Commitments

The reserve for unfunded commitments provides for probable losses inherent with funding the unused portion of legal commitments to lend. The unfunded reserve calculation is primarily based on our allowance for loan loss methodology for funded loans, adjusted for utilization expectations. The reserve for unfunded credit commitments is included within other liabilities in the accompanying Consolidated Balance Sheets. Changes in the reserve are reported as a component of other noninterest expense in the accompanying Consolidated Statements of Income.

54

Investment Securities

At September 30, 2021, the carrying value of our investment securities portfolio totaled $105.9 million and represented 4.8% of total assets, compared to $106.9 million, or 4.7% of total assets, at December 31, 2020.

The net unrealized gain position on our investment portfolio at September 30, 2021 was $5.0 million and included gross unrealized losses of $0.4 million. The net unrealized gain position on our investment portfolio at December 31, 2020 was $7.5 million and included no gross unrealized losses.

Deposit Activities and Other Sources of Funds
September 30, 2021December 31, 2020
(Dollars in thousands)AmountPercentAmountPercent
Noninterest bearing demand$338,705 17.99 %$270,235 14.79 %
NOW103,180 5.48 101,737 5.57 
Money market835,210 44.36 669,364 36.63 
Savings188,581 10.02 158,750 8.69 
Time417,147 22.15 627,230 34.32 
Total deposits$1,882,823 100.00 %$1,827,316 100.00 %

Total deposits were $1.9 billion at September 30, 2021, an increase of $55.5 million, from the balance at December 31, 2020.

Brokered certificates of deposits totaled $200.1 million at September 30, 2021 and $238.9 million at December 31, 2020. There
were no certificates of deposits from national listing services at September 30, 2021. Certificates of deposits from national listing services totaled $18.4 million at December 31, 2020. Brokered money market accounts totaled $104.0 million at September 30, 2021 and $13.5 million at December 31, 2020. Brokered deposits represent brokered certificates of deposit, brokered money market accounts, one way buy Certificate of Deposit Account Registry Service (CDARS), and one way buy Insured Cash Sweep (ICS).

At September 30, 2021 and December 31, 2020, time deposits with a denomination of $100 thousand or more, including CDARS and brokered deposits, totaled $348.3 million and $519.8 million, respectively, maturing during the periods indicated in the table below:
(Dollars in thousands)September 30, 2021December 31, 2020
Maturing:
Within 3 months$92,640 $141,784 
After 3 but within 6 months28,059 67,064 
After 6 months but within 1 year35,142 118,880 
After 1 year192,430 192,051 
Total$348,271 $519,779 

We utilize advances from the Federal Home Loan Bank of Boston, or FHLB, as part of our overall funding strategy and to meet short-term liquidity needs, and to a lesser degree, manage interest rate risk arising from the difference in asset and liability maturities. Total FHLB advances were $80.0 million and $175.0 million at September 30, 2021 and December 31, 2020, respectively. The decrease of $95.0 million, or 54.3%, primarily reflects the substitution of lower cost brokered deposits in lieu of FHLB advances totaling $75.0 million and a permanent reduction in wholesale funding totaling $20.0 million.

The Bank has additional borrowing capacity at the FHLB up to a certain percentage of the value of qualified collateral. In accordance with agreements with the FHLB, the qualified collateral must be free and clear of liens, pledges and encumbrances. At September 30, 2021, the Bank had pledged $719.1 million of eligible loans as collateral to support borrowing capacity at the FHLB of Boston. As of September 30, 2021, the Bank had immediate availability to borrow an additional $359.2 million based on qualified collateral.

55

Liquidity and Capital Resources

Liquidity Management

Liquidity is defined as the ability to generate sufficient cash flows to meet all present and future funding requirements at reasonable costs. Our primary source of liquidity is deposits. While our generally preferred funding strategy is to attract and retain low cost deposits, our ability to do so is affected by competitive interest rates and terms in the marketplace. Other sources of funding include discretionary use of purchased liabilities (e.g., FHLB term advances and other borrowings), cash flows from our investment securities portfolios, loan sales, loan repayments and earnings. Investment securities designated as available for sale may also be sold in response to short-term or long-term liquidity needs.

The Bank’s liquidity positions are monitored daily by management. The Asset Liability Committee ("ALCO") establishes guidelines to ensure maintenance of prudent levels of liquidity. ALCO reports to the Company’s Board of Directors.

The Bank has a detailed liquidity funding policy and a contingency funding plan that provide for the prompt and comprehensive response to unexpected demands for liquidity. We employ a stress testing methodology to estimate needs for contingent funding that could result from unexpected outflows of funds in excess of “business as usual” cash flows. The Bank has established unsecured borrowing capacity with the Atlantic Community Bankers Bank ("ACBB") (formerly Bankers’ Bank Northeast), Zion’s Bank and Texas Capital Bank and also maintains additional collateralized borrowing capacity with the FHLB in excess of levels used in the ordinary course of business. Our sources of liquidity include cash, unpledged investment securities, borrowings from the FHLB, lines of credit from ACBB, Zion’s Bank and Texas Capital Bank, the brokered deposit market and national CD listing services.

The Company anticipates that it will have sufficient funds available to meet its current loan and other commitments. As of September 30, 2021, the Company had cash and cash equivalents of $177.5 million and available-for-sale securities of $87.6 million. At September 30, 2021, outstanding commitments to originate loans totaled $137.0 million and undisbursed funds from approved lines of credit, home equity lines of credit and secured commercial lines of credit totaled $268.3 million.

Capital Resources

Shareholders’ equity totaled $196.2 million as of September 30, 2021, an increase of $19.6 million compared to December 31, 2020, primarily a result of (i) net income of $18.8 million for the nine months ended September 30, 2021 and (ii) a $6.2 million favorable impact to accumulated other comprehensive income driven by fair value marks related to hedge positions involving interest rate swaps. The Company's interest rate swaps are used to hedge interest rate risk. The Company's current interest rate swap positions will cause a decrease to other comprehensive income in a falling interest rate environment and an increase in a rising interest rate environment. The increase in Shareholders’ equity was partially offset by dividends paid of $3.6 million and common stock repurchases of $3.2 million. As of September 30, 2021, the tangible common equity ratio and tangible book value per share were 8.70% and $25.25, respectively.

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. At September 30, 2021, the Bank met all capital adequacy requirements to which it was subject and exceeded the regulatory minimum capital levels to be considered well-capitalized under the regulatory framework for prompt corrective action. At September 30, 2021, the Bank’s ratio of Common Equity Tier 1 capital to risk-weighted assets was 10.59%, total capital to risk-weighted assets was 11.44%, Tier 1 capital to risk-weighted assets was 10.59% and Tier 1 capital to average assets was 9.61%.

In July 2013, the Federal Reserve published Basel III rules establishing a new comprehensive capital framework of U.S. banking organizations. Under the rules, effective January 1, 2015 for the Company and Bank, the minimum capital ratios became a) 4.5% Common Equity Tier 1 to risk-weighted assets, b) 6.0% Tier 1 capital to risk weighted assets and c) 8.0% total capital to risk-weighted assets. In addition, the new regulations imposed certain limitations on dividends, share buy-backs, discretionary payments on Tier 1 instruments and discretionary bonuses to executive officers if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity to risk weighted assets, in addition to the amounts necessary to meet the minimum risk-based capital requirements described above.

56

Asset/Liability Management and Interest Rate Risk

We measure interest rate risk using simulation analysis to calculate earnings and equity at risk. These risk measures are quantified using simulation software from one of the leading firms in the field of asset/liability modeling. Key assumptions relate to the behavior of interest rates and spreads, prepayment speeds and the run-off of deposits. From such simulations, interest rate risk, or IRR, is quantified and appropriate strategies are formulated and implemented. We model IRR by using two primary risk measurement techniques: simulation of net interest income and simulation of economic value of equity. These two measurements are complementary and provide both short-term and long-term risk profiles for the Company. Because both baseline simulations assume that our balance sheet will remain static over the simulation horizon, the results do not reflect adjustments in strategy that ALCO could implement in response to rate shifts. The simulation analyses are updated quarterly.

We use a net interest income at risk simulation to measure the sensitivity of net interest income to changes in market rates. This simulation captures underlying product behaviors, such as asset and liability repricing dates, balloon dates, interest rate indices and spreads, rate caps and floors, as well as other behavioral attributes. The simulation of net interest income also requires a number of key assumptions such as: (i) prepayment projections for loans and securities that are projected under each interest rate scenario using internal and external mortgage analytics; (ii) new business loan rates that are based on recent new business origination experience; and (iii) deposit pricing assumptions for non-maturity deposits reflecting the Bank’s limited history, management judgment and core deposit studies. Combined, these assumptions can be inherently uncertain, and as a result, actual results may differ from simulation forecasts due to the timing, magnitude and frequency of interest rate changes, future business conditions, as well as unanticipated changes in management strategies.

We use two sets of standard scenarios to measure net interest income at risk. For the Parallel Ramp Scenarios, rate changes are ramped over a twelve-month horizon based upon a parallel yield curve shift and then maintained at those levels over the remainder of the simulation horizon. Parallel Shock Scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Simulation analysis involves projecting a future balance sheet structure and interest income and expense under the various rate scenarios. Internal policy regarding internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net interest income at risk for the subsequent one-year period should not decline by more than: 6% for a 100 basis point shift; 12% for a 200 basis point shift; and 18% for a 300 basis point shift. Per Company policy, the Bank should not be outside these limits for twelve consecutive months unless the Bank's forecasted capital ratios are considered to be "well capitalized". As of September 30, 2021, the Bank has met all minimum regulatory capital requirements to be considered "well capitalized" (reference footnote 7 to the consolidated financial statements for more detail).

The following tables set forth the estimated percentage change in our net interest income at risk over one-year simulation periods beginning September 30, 2021 and December 31, 2020:
Parallel RampEstimated Percent Change in Net Interest Income
Rate Changes (basis points)September 30, 2021December 31, 2020
-100(0.80)%0.20 %
+200(3.40)(1.40)


Parallel ShockEstimated Percent Change in Net Interest Income
Rate Changes (basis points)September 30, 2021December 31, 2020
-100(1.50)%(0.30)%
+100(2.60)(1.00)
+200(4.80)(1.70)
+300(6.40)(2.00)

The net interest income at risk simulation results indicate that, as of September 30, 2021, we remain liability sensitive. The liability sensitivity is due to the fact that there are more liabilities than assets subject to repricing as market rates change.

57

We conduct an economic value of equity at risk simulation in tandem with net interest income simulations, to ascertain a longer term view of our interest rate risk position by capturing longer-term repricing risk and options risk embedded in the balance sheet. It measures the sensitivity of economic value of equity to changes in interest rates. The economic value of equity at risk simulation values only the current balance sheet and does not incorporate the growth assumptions used in one of the income simulations. As with the net interest income simulation, this simulation captures product characteristics such as loan resets, repricing terms, maturity dates, rate caps and floors. Key assumptions include loan prepayment speeds, deposit pricing elasticity and non-maturity deposit attrition rates. These assumptions can have significant impacts on valuation results as the assumptions remain in effect for the entire life of each asset and liability. All key assumptions are subject to a periodic review.

Base case economic value of equity at risk is calculated by estimating the net present value of all future cash flows from existing assets and liabilities using current interest rates. The base case scenario assumes that future interest rates remain unchanged.

The following table sets forth the estimated percentage change in our economic value of equity at risk, assuming various shifts in interest rates:
Estimated Percent Change in Economic Value of Equity ("EVE")
Rate Changes (basis points)September 30, 2021December 31, 2020
-100(25.20)%(47.30)%
+1002.40 9.30 
+2002.20 13.80 
+3002.70 18.40 

While ALCO reviews and updates simulation assumptions and also periodically back-tests the simulation results to ensure that the assumptions are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk or future net interest margin. Over time, the repricing, maturity and prepayment characteristics of financial instruments and the composition of our balance sheet may change to a different degree than estimated. ALCO recognizes that deposit balances could shift into higher yielding alternatives as market rates change. ALCO has modeled increased costs of deposits in the rising rate simulation scenarios presented above. In the minus 100 scenario above, the change in EVE of (25.2)% is outside of policy parameters, however, the Bank continues to be well-capitalized. The result of this simulation was discussed with the ALCO and the Company has decided to not take any further action at this time as this scenario is deemed unlikely in the current interest rate environment.

It should be noted that the static balance sheet assumption does not necessarily reflect our expectation for future balance sheet growth, which is a function of the business environment and customer behavior. Another significant simulation assumption is the sensitivity of core deposits to fluctuations in interest rates. Income simulation results assume that changes in both core savings deposit rates and balances are related to changes in short-term interest rates. Lastly, mortgage-backed securities and mortgage loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments. Such changes could affect the level of reinvestment risk associated with cash flow from these instruments, as well as their market value. Changes in prepayment speeds could also increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk Management

Interest rate risk management is our primary market risk. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset/Liability Management and Interest Rate Risk” herein for a discussion of our management of our interest rate risk.

58

Impact of Inflation

Our financial statements and related data contained in this quarterly report have been prepared in accordance with GAAP, which requires the measure of financial position and operating results in terms of historic dollars, without considering changes in the relative purchasing power of money over time due to inflation.

Inflation generally increases the costs of funds and operating overhead, and to the extent loans and other assets bear variable rates, the yields on such assets. Unlike the assets and liabilities of most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant effect on the performance of a financial institution than the effects of general levels of inflation. In addition, inflation affects a financial institution’s cost of goods and services purchased, the cost of salaries and benefits, occupancy expense and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings and shareholders’ equity.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures:

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period reported on in this report, the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiary) required to be included in the Company’s periodic SEC filings.

(b) Change in internal controls:

There has been no change in the Company’s internal control over financial reporting during the quarter ended September 30, 2021 that has materially affected, or is reasonably likely to affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Company and the Bank are periodically involved in various legal proceedings as normal incident to their businesses. In the opinion of management, no material loss is expected from any such pending lawsuit.

Item 1A. Risk Factors

There have been no material changes in risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC.

59

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

Issuer Purchases of Equity Securities

The following table includes information with respect to repurchases of the Company’s Common Stock during the three-month period ended September 30, 2021 under the Company’s share repurchase program.
Issuer Purchases of Equity Securities

Period(a) Total Number of Shares (or Units) Purchased(b) Average Price Paid per Share (or Unit)(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs(1)
July 1, 2021 - July 31, 202152,277 $27.26 52,277 175,901 
August 1, 2021 - August 31, 2021— — — 175,901 
September 1, 2021 - September 30, 2021— — — 175,901 
Total52,277 $27.26 52,277 175,901 
    
(1) On December 19, 2018, the Company’s Board of Directors authorized a share repurchase program of up to 400,000 shares of the Company’s Common Stock. The Company may repurchase shares in open market transactions or by other means, such as privately negotiated transactions. The timing, price and volume of repurchases will be based on market conditions, relevant securities laws and other factors. The share repurchase plan does not obligate the Company to acquire any particular amount of Common Stock, and it may be modified or suspended at any time at the Company's discretion.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

60

Item 6. Exhibits

The following exhibits are filed herewith:
31.1
Certification of Christopher R. Gruseke pursuant to Rule 13a-14(a)
31.2
Certification of Penko Ivanov pursuant to Rule 13a-14(a)
32
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101The following materials from Bankwell Financial Group, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2021, formatted in Inline eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income (Loss); (iv) Consolidated Statements of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements.
104Cover Page Interactive Data File (formatting in Inline XBRL and contained in Exhibit 101)
Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Bankwell Financial Group, Inc.
Date: November 8, 2021/s/ Christopher R. Gruseke
Christopher R. Gruseke
President and Chief Executive Officer
Date: November 8, 2021/s/ Penko Ivanov
Penko Ivanov
Executive Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
61

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