BWFG 10-Q Quarterly Report Sept. 30, 2021

BANKWELL FINANCIAL GROUP, INC.

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bwfg-20210930

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

☐ 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)


Connecticut						20-8251355
(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. ¨

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.

Bankwell Financial Group, Inc.

Form 10-Q

Table of Contents


PART I – FINANCIAL INFORMATION

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

PART II – OTHER INFORMATION

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

Signatures			61

Certifications

PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements

Bankwell Financial Group, Inc.

Consolidated Balance Sheets - (unaudited)

(In thousands, except share data)


	September 30, 2021		December 31, 2020
ASSETS
Cash and due from banks	$	169,417	$	405,340
Federal funds sold	8,097		4,258
Cash and cash equivalents	177,514		409,598

Investment securities
Marketable equity securities, at fair value	2,185		2,207
Available for sale investment securities, at fair value	87,565		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 securities	105,857		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 receivable	6,911		6,579
Federal Home Loan Bank stock, at cost	3,632		7,860
Premises and equipment, net	35,118		21,762
Bank-owned life insurance	48,903		42,651
Goodwill	2,589		2,589
Other intangible assets	48		76
Deferred income taxes, net	7,718		11,300
Other assets	33,181		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 deposits	1,544,118		1,557,081
Total deposits	1,882,823		1,827,316

Advances from the Federal Home Loan Bank	80,000		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 liabilities	52,314		49,571
Total liabilities	2,030,511		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 earnings	85,992		70,839
Accumulated other comprehensive loss	( 9,403 )		( 15,575 )
Total shareholders' equity	196,177		176,602

Total liabilities and shareholders' equity	$	2,226,688	$	2,253,747

See accompanying notes to consolidated financial statements (unaudited)

Bankwell Financial Group, Inc.

Consolidated Statements of Income – (unaudited)

(In thousands, except share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Interest and dividend income
Interest and fees on loans	$	19,795	$	18,027	$	56,961	$	55,471
Interest and dividends on securities	731		799		2,236		2,402
Interest on cash and cash equivalents	88		96		286		468
Total interest and dividend income	20,614		18,922		59,483		58,341

Interest expense
Interest expense on deposits	2,387		4,104		8,245		14,623
Interest expense on borrowings	503		1,210		2,280		3,187
Total interest expense	2,890		5,314		10,525		17,810

Net interest income	17,724		13,608		48,958		40,531

Provision (credit) for loan losses	134		712		( 182 )		6,896

Net interest income after provision (credit) for loan losses	17,590		12,896		49,140		33,635

Noninterest income
Gains and fees from sales of loans	924		27		2,251		27
Bank-owned life insurance	271		242		753		726
Service charges and fees	199		190		615		578
Gain on sale of other real estate owned, net	—		19		—		19

Other	43		136		1,213		913
Total noninterest income	1,437		614		4,832		2,263

Noninterest expense
Salaries and employee benefits	4,782		5,295		13,511		15,902
Occupancy and equipment	2,615		2,266		8,271		6,410
Data processing	632		529		1,977		1,558
Professional services	498		374		1,632		1,519
Director fees	324		301		968		883
FDIC insurance	298		176		1,001		529
Marketing	186		151		317		512
Other	1,035		637		2,383		1,797
Total noninterest expense	10,370		9,729		30,060		29,110
Income before income tax expense	8,657		3,781		23,912		6,788
Income tax expense	1,802		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:
Basic	7,677,822		7,721,247		7,721,943		7,728,798
Diluted	7,738,758		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)

Bankwell Financial Group, Inc.

Consolidated Statements of Comprehensive Income (Loss) – (unaudited)

(In thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
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 swaps	1,436		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 tax	1,115		1,619		6,753		( 12,746 )
Total other comprehensive income (loss), net of tax	796		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)

Bankwell Financial Group, Inc.

Consolidated Statements of Shareholders' Equity – (unaudited)

(In thousands, except share data)


	Number of Outstanding Shares	Common Stock		Retained Earnings		Accumulated Other Comprehensive Loss		Total
Balance at June 30, 2021	7,895,101	$	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, 2021	7,842,824	$	119,588	$	85,992	$	( 9,403 )	$	196,177


	Number of Outstanding Shares	Common Stock		Retained Earnings		Accumulated Other Comprehensive Loss		Total
Balance at June 30, 2020	7,887,503	$	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 stock	9,000	—		—		—		—


Balance at September 30, 2020	7,896,503	$	120,854	$	71,603	$	( 18,190 )	$	174,267

See accompanying notes to consolidated financial statements (unaudited)

Bankwell Financial Group, Inc.

Consolidated Statements of Shareholders' Equity – (continued)

(In thousands, except share data)


	Number of Outstanding Shares	Common Stock		Retained Earnings		Accumulated Other Comprehensive Loss		Total
Balance at December 31, 2020	7,919,278	$	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 stock	51,628	—		—		—		—
Stock options exercised	3,500	53		—		—		53
Repurchase of common stock	( 131,432 )	( 3,221 )		—		—		( 3,221 )
Balance at September 30, 2021	7,842,824	$	119,588	$	85,992	$	( 9,403 )	$	196,177


	Number of Outstanding Shares	Common Stock		Retained Earnings		Accumulated Other Comprehensive Loss		Total
Balance at December 31, 2019	7,868,803	$	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 stock	86,199	—		—		—		—
Stock options exercised	1,500	16		—		—		16
Repurchase of common stock	( 58,499 )	( 1,037 )		—		—		( 1,037 )
Balance at September 30, 2020	7,896,503	$	120,854	$	71,603	$	( 18,190 )	$	174,267

See accompanying notes to consolidated financial statements (unaudited)

Bankwell Financial Group, Inc.

Consolidated Statements of Cash Flows – (unaudited)

(In thousands)


	Nine Months Ended September 30,
	2021		2020
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 securities	162		47
(Credit) provision for loan losses	( 182 )		6,896
Provision (credit) for deferred income taxes	1,827		( 2,353 )

Change in fair value of marketable equity securities	40		( 57 )
Depreciation and amortization	2,694		2,484
Amortization of debt issuance costs	116		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 compensation	1,418		1,286
Amortization of intangibles	28		54
Loss on sale of premises and equipment	195		—
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 assets	8,062		( 20,322 )
Accrued expenses and other liabilities	1,056		( 1,470 )
Net cash provided by (used in) operating activities	30,152		( 8,495 )

Cash flows from investing activities
Proceeds from principal repayments on available for sale securities	12,778		9,920
Proceeds from principal repayments on held to maturity securities	4,713		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 sale	19,373		241
Purchases of premises and equipment, net	( 4,080 )		( 409 )
Reduction (purchase) of Federal Home Loan Bank stock	4,228		( 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)

Bankwell Financial Group, Inc.

Consolidated Statements of Cash Flows - (Continued)

(In thousands)


	Nine Months Ended September 30,
	2021		2020
Cash flows from financing activities
Net change in time certificates of deposit	$	( 210,083 )	$	89,072
Net change in other deposits	265,590		186,553
Net change in FHLB advances	( 95,000 )		25,000

Repayment of subordinated debt	( 10,000 )		—
Proceeds from exercise of options	53		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 year	409,598		78,051
End of period	$	177,514	$	339,483
Supplemental disclosures of cash flows information:
Cash paid for:
Interest	$	3,707	$	18,067
Income taxes	4,024		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 securities	743		2,661
Net change in unrealized gains or losses on interest rate swaps	8,671		( 16,400 )
Establishment of right-of-use asset and lease liability	11,885		169

See accompanying notes to consolidated financial statements (unaudited)

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.

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

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 Cost		Gross Unrealized				Fair Value
			Gains		Losses
	(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 years	10,598		—		( 57 )		10,541
Due from five through ten years	7,904		604		—		8,508
Due after ten years	42,780		1,674		( 37 )		44,417
Total U.S. Government and agency obligations	71,277		2,310		( 94 )		73,493

Corporate bonds
Due from one through five years	1,000		17		—		1,017
Due from five through ten years	11,000		461		—		11,461
Due after ten years	1,500		94		—		1,594
Total corporate bonds	13,500		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 maturity	49		8		—		57
Total held to maturity securities	$	16,107	$	2,526	$	( 273 )	$	18,360

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 Cost		Gross Unrealized				Fair Value
			Gains		Losses
	(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 years	8,038		848		—		8,886
Due after ten years	55,560		2,284		—		57,844
Total U.S. Government and agency obligations	73,574		3,304		—		76,878
Corporate bonds

Due from one through five years	4,000		57		—		4,057
Due from five through ten years	6,000		163		—		6,163
Due after ten years	1,500		7		—		1,507
Total corporate bonds	11,500		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 maturity	60		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.

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 Months						12 Months or More						Total
	Fair Value		Unrealized Loss		Percent Decline from Amortized Cost		Fair Value		Unrealized Loss		Percent Decline from Amortized Cost		Fair Value		Unrealized 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 obligations	4,392		( 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.

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, 2021		December 31, 2020
Real estate loans:
Residential	$	90,110	$	113,557
Commercial	1,337,896		1,148,383
Construction	94,665		87,007
	1,522,671		1,348,947

Commercial business (1)	292,825		276,601

Consumer	9,050		79
Total loans	1,824,546		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.

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.

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 Estate		Commercial Real Estate		Construction		Commercial Business		Consumer		Total
	(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 Estate		Commercial Real Estate		Construction		Commercial Business		Consumer		Total
	(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 Estate		Commercial Real Estate		Construction		Commercial Business		Consumer		Total
	(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 Estate		Commercial Real Estate		Construction		Commercial Business		Consumer		Total
	(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

Loans evaluated for impairment and the related allowance for loan losses as of September 30, 2021 and December 31, 2020 were as follows:


	Portfolio		Allowance
	(In thousands)
September 30, 2021
Loans individually evaluated for impairment:
Residential real estate	$	4,817	$	189
Commercial real estate	31,489		2,618
Construction	8,997		—
Commercial business	4,731		65

Subtotal	50,034		2,872
Loans collectively evaluated for impairment:
Residential real estate	85,293		287
Commercial real estate	1,306,407		10,628
Construction	85,668		142
Commercial business	288,094		2,838
Consumer	9,050		36
Subtotal	1,774,512		13,931

Total	$	1,824,546	$	16,803


	Portfolio		Allowance
	(In thousands)
December 31, 2020
Loans individually evaluated for impairment:
Residential real estate	$	4,604	$	—
Commercial real estate	37,579		4,960
Construction	8,997		—
Commercial business	6,507		85

Subtotal	57,687		5,045
Loans collectively evaluated for impairment:
Residential real estate	108,953		610
Commercial real estate	1,110,804		11,465
Construction	78,010		221
Commercial business	270,094		3,668
Consumer	79		—
Subtotal	1,567,940		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.

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.

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, 2021								December 31, 2020
	Commercial Real Estate		Construction		Commercial Business		Total		Commercial Real Estate		Construction		Commercial Business		Total
	(In thousands)
Pass	$	1,287,568	$	85,668	$	286,641	$	1,659,877	$	1,105,825	$	78,010	$	269,728	$	1,453,563
Special Mention	18,839		—		1,454		20,293		12,560		—		2,055		14,615
Substandard	31,072		8,997		3,198		43,267		29,998		8,997		3,247		42,242
Doubtful	417		—		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, 2021						December 31, 2020
	Residential Real Estate		Consumer		Total		Residential Real Estate		Consumer		Total
	(In thousands)
Pass	$	85,293	$	9,050	$	94,343	$	108,953	$	79	$	109,032
Special Mention	—		—		—		713		—		713
Substandard	4,642		—		4,642		3,714		—		3,714
Doubtful	175		—		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.

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 Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total Loans
	(In thousands)
Real estate loans:
Residential real estate	$	1,535	$	703	$	176	$	2,414	$	87,696	$	90,110
Commercial real estate	877		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 Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total Loans
	(In thousands)
Real estate loans:
Residential real estate	$	245	$	—	$	177	$	422	$	113,135	$	113,557
Commercial real estate	1,305		193		2,541		4,039		1,144,344		1,148,383
Construction	8,997		—		—		8,997		78,010		87,007
Commercial business	45		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, 2021		December 31, 2020
	(In thousands)
Residential real estate	$	1,849	$	1,492
Commercial real estate	16,314		21,093
Commercial business	1,754		1,834
Construction	8,997		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.

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 Amount				Unpaid Principal Balance				Associated Allowance
	September 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020
	(In thousands)
Impaired loans without a valuation allowance:
Residential real estate	$	3,048	$	3,891	$	3,224	$	4,108	$	—	$	—
Commercial real estate	10,137		8,964		10,490		9,282		—		—
Construction	8,997		8,997		8,997		8,997		—		—
Commercial business	1,971		1,899		2,608		2,512		—		—

Total impaired loans without a valuation allowance	24,153		23,751		25,319		24,899		—		—

Impaired loans with a valuation allowance:
Residential real estate	$	1,769	$	—	$	1,769	$	—	$	189	$	—
Commercial real estate	21,352		21,035		21,394		21,049		2,618		4,960

Commercial business	2,760		2,920		2,760		2,922		65		85
Total impaired loans with a valuation allowance	25,881		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

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 Amount				Interest Income Recognized
	Three Months Ended September 30,				Three Months Ended September 30,
	2021		2020		2021		2020
	(In thousands)
Impaired loans without a valuation allowance:
Residential real estate	$	3,058	$	4,035	$	13	$	16
Commercial real estate	10,153		7,376		72		37
Commercial business	1,987		4,123		5		5
Construction	8,997		—		—		—

Total impaired loans without a valuation allowance	24,195		15,534		90		58
Impaired loans with a valuation allowance:
Residential real estate	$	1,775	$	—	$	12	$	—
Commercial real estate	20,301		6,259		62		78

Commercial business	2,763		30		18		—

Total impaired loans with a valuation allowance	24,839		6,289		92		78
Total impaired loans	$	49,034	$	21,823	$	182	$	136


	Average Carrying Amount				Interest Income Recognized
	Nine Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
	(In thousands)
Impaired loans without a valuation allowance:
Residential real estate	$	3,080	$	4,083	$	28	$	70
Commercial real estate	10,121		7,513		435		109
Commercial business	2,018		4,173		18		15
Construction	8,997		—		—		—

Total impaired loans without a valuation allowance	24,216		15,769		481		194
Impaired loans with a valuation allowance:
Residential real estate	$	1,791	$	—	$	40	$	—
Commercial real estate	22,386		6,278		490		204
Commercial business	2,772		30		76		—


Total impaired loans with a valuation allowance	26,949		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.

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 Loans		Pre-Modification				Post-Modification
(Dollars in thousands)	2021	2020	2021		2020		2021		2020
Three Months Ended September 30,


Commercial real estate	1	—	$	10,317	$	—	$	10,402	$	—
Total	1	—	$	10,317	$	—	$	10,402	$	—



	Number of Loans		Pre-Modification				Post-Modification
(Dollars in thousands)	2021	2020	2021		2020		2021		2020
Nine Months Ended September 30,
Residential real estate	2	—	$	764	$	—	$	764	$	—
Commercial business	1	—	2,567		—		2,655		—
Commercial real estate	2	—	13,534		—		13,570		—
Total	5	—	$	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,
	2021		2020		2021		2020
	(In thousands)
Payment concession	$	—	$	—	$	764	$	—

Maturity, rate and payment concession	10,402		—		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.

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.

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 Securities		Net Unrealized Gain (Loss) on Interest Rate Swaps		Total
	(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 Securities		Net Unrealized Gain (Loss) on Interest Rate Swaps		Total
	(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 Securities		Net Unrealized Gain (Loss) on Interest Rate Swaps		Total
	(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 Securities		Net Unrealized Gain (Loss) on Interest Rate Swaps		Total
	(In thousands)
Balance at December 31, 2019	$	928	$	( 8,444 )	$	( 7,516 )
Other comprehensive income (loss) before reclassifications, net of tax	2,072		( 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 )

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


Accumulated Other Comprehensive Income Components	Three Months Ended September 30,				Nine Months Ended September 30,				Associated Line Item in the Consolidated Statements of Income
	2021		2020		2021		2020
	(In thousands)




Derivatives:
Unrealized losses on derivatives	$	( 921 )	$	( 821 )	$	( 2,796 )	$	( 1,154 )	Interest expense on borrowings
Tax benefit	206		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,
	2021		2020		2021		2020
	(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, basic	7,678		7,721		7,722		7,729
Effect of dilutive equity-based awards (2)	61		—		58		20
Weighted average shares outstanding, diluted	7,739		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.

(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:


					Minimum Regulatory Capital Required for Capital Adequacy plus Capital Conservation Buffer				Minimum Regulatory Capital to be Well Capitalized Under Prompt Corrective Action Provisions
	Actual Capital
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
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 Assets	230,049		11.44	%	211,184		10.50	%	201,127		10.00	%
Tier I Capital to Risk-Weighted Assets	213,091		10.59	%	170,958		8.50	%	160,902		8.00	%
Tier I Capital to Average Assets	213,091		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/A		N/A
Total Capital to Risk-Weighted Assets	231,878		11.48	%	212,016		10.50	%	N/A		N/A
Tier I Capital to Risk-Weighted Assets	202,394		10.02	%	171,632		8.50	%	N/A		N/A
Tier I Capital to Average Assets	202,394		9.12	%	88,813		4.00	%	N/A		N/A


					Minimum Regulatory Capital Required for Capital Adequacy plus Capital Conservation Buffer				Minimum Regulatory Capital to be Well Capitalized Under Prompt Corrective Action Provisions
	Actual Capital
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
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 Assets	212,588		12.28	%	181,825		10.50	%	173,166		10.00	%
Tier I Capital to Risk-Weighted Assets	191,579		11.06	%	147,191		8.50	%	138,533		8.00	%
Tier I Capital to Average Assets	191,579		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/A		N/A
Total Capital to Risk-Weighted Assets	230,696		13.30	%	182,111		10.50	%	N/A		N/A
Tier I Capital to Risk-Weighted Assets	189,529		10.93	%	147,423		8.50	%	N/A		N/A
Tier I Capital to Average Assets	189,529		8.34	%	90,916		4.00	%	N/A		N/A

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, 2021		December 31, 2020
	(In thousands)
Noninterest bearing demand deposit accounts	$	338,705	$	270,235
Interest bearing accounts:
NOW	103,180		101,737
Money market	835,210		669,364
Savings	188,581		158,750
Time certificates of deposit	417,147		627,230
Total interest bearing accounts	1,544,118		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, 2021		December 31, 2020
	(In thousands)
2021	$	109,663	$	418,117
2022	105,610		50,425
2023	150,119		128,495
2024	51,722		30,160
2025	33		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.

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,
	2021		2020		2021		2020
	(In thousands)
NOW	$	51	$	40	$	148	$	99
Money market	1,053		859		2,944		3,213
Savings	96		237		313		1,204
Time certificates of deposits	1,187		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 Shares	Weighted Average Exercise Price
Options outstanding at beginning of period	15,180	$	16.82
Exercised	( 3,500 )	15.00
Options outstanding at end of period	11,680	17.37

Options exercisable at end of period	11,680	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 .

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 Shares		Weighted Average Grant Date Fair Value
Unvested at beginning of period	163,369	(1)	$	26.22
Granted	51,628	(2)	18.97
Vested	( 36,050 )		27.39
Forfeited	( 150 )		33.02
Unvested at end of period	178,797		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.

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


	As of September 30, 2021
	Derivative Assets					Derivative Liabilities
	Notional Amount		Balance Sheet Location	Fair Value		Notional Amount		Balance Sheet Location	Fair 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 Assets					Derivative Liabilities
	Notional Amount		Balance Sheet Location	Fair Value		Notional Amount		Balance Sheet Location	Fair 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.

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)	2021		2020		2021		2020
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 income	921		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 Position		Net Amounts of Assets presented in the Statement of Financial Position		Financial Instruments		Cash Collateral Received		Net 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 Position		Net Amounts of Liabilities presented in the Statement of Financial Position		Financial Instruments		Cash Collateral Posted		Net Amount
Derivative Liabilities	$	18,375	$	—	$	18,375	$	—	$	17,440	$	935

(1) Includes accrued interest payable totaling $ 562 thousand.


	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 Position		Net Amounts of Assets presented in the Statement of Financial Position		Financial Instruments		Cash Collateral Received		Net 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 Position		Net Amounts of Liabilities presented in the Statement of Financial Position		Financial Instruments		Cash Collateral Posted		Net 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.

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 Value		Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and due from banks	$	169,417	$	169,417	$	169,417	$	—	$	—
Federal funds sold	8,097		8,097		8,097		—		—
Marketable equity securities	2,185		2,185		2,185		—		—
Available for sale securities	87,565		87,565		20,568		66,997		—
Held to maturity securities	16,107		18,360		—		57		18,303
Loans receivable, net	1,805,217		1,792,793		—		—		1,792,793

Accrued interest receivable	6,911		6,911		—		6,911		—
FHLB stock	3,632		3,632		—		3,632		—
Servicing asset, net of valuation allowance	813		813		—		—		813
Derivative asset	2,917		2,917		—		2,917		—
Assets held for sale	2,613		2,613		—		—		2,613

Financial Liabilities:
Noninterest bearing deposits	$	338,705	$	338,705	$	—	$	338,705	$	—
NOW and money market	938,390		938,390		—		938,390		—
Savings	188,581		188,581		—		188,581		—
Time deposits	417,147		418,703		—		—		418,703
Accrued interest payable	933		933		—		933		—
Advances from the FHLB	80,000		79,998		—		—		79,998
Subordinated debentures	15,500		15,500		—		—		15,500
Servicing liability	13		13		—		—		13
Derivative liability	17,813		17,813		—		17,813		—


	December 31, 2020
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and due from banks	$	405,340	$	405,340	$	405,340	$	—	$	—
Federal funds sold	4,258		4,258		4,258		—		—
Marketable equity securities	2,207		2,207		2,207		—		—
Available for sale securities	88,605		88,605		10,148		78,457		—
Held to maturity securities	16,078		20,032		—		70		19,962
Loans receivable, net	1,601,672		1,605,402		—		—		1,605,402
Accrued interest receivable	6,579		6,579		—		6,579		—
FHLB stock	7,860		7,860		—		7,860		—
Servicing asset, net of valuation allowance	628		628		—		—		628
Derivative asset	4,444		4,444		—		4,444		—
Assets held for sale	2,613		2,613		—		—		2,613

Financial Liabilities:
Noninterest bearing deposits	$	270,235	$	270,235	$	—	$	270,235	$	—
NOW and money market	771,101		771,101		—		771,101		—
Savings	158,750		158,750		—		158,750		—
Time deposits	627,230		631,891		—		—		631,891
Accrued interest payable	1,750		1,750		—		1,750		—
Advances from the FHLB	175,000		174,997		—		—		174,997
Subordinated debentures	25,258		25,447		—		—		25,447
Servicing liability	21		21		—		—		21
Derivative liability	28,011		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.

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.

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 1		Level 2		Level 3
September 30, 2021:
Marketable equity securities	$	2,185	$	—	$	—
Available for sale investment securities:
U.S. Government and agency obligations	20,568		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 obligations	10,148		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.

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 1		Level 2		Level 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 Value		Valuation Methodology	Unobservable Input	Range
	(Dollars in thousands)
September 30, 2021:
Impaired loans	$	21,602	Appraisals	Discount to appraised value	8.00 %
	25,560		Discounted cash flows	Discount rate	3.00 - 6.75 %
	$	47,162



Servicing asset, net	$	800	Discounted cash flows	Discount rate	10.00 % (1)
				Prepayment rate	3.00 - 17.00 %

December 31, 2020:
Impaired loans	$	20,703	Appraisals	Discount to appraised value	8.00 - 33.00 %
	21,958		Discounted cash flows	Discount rate	3.00 - 12.00 %
	$	42,661

Servicing asset, net	$	607	Discounted cash flows	Discount 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

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.

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.

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

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

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.

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,
	2021						2020

(Dollars in thousands)	Average Balance		Interest		Yield / Rate (4)		Average Balance		Interest		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 estate	1,270,375		14,345		4.42		1,087,765		12,570		4.52
Residential real estate	95,100		809		3.40		125,069		1,097		3.51
Construction	88,728		845		3.73		94,984		1,029		4.24
Commercial business	314,484		3,707		4.61		322,066		3,329		4.04
Consumer	8,870		89		3.99		121		2		7.37
Total loans	1,777,557		19,795		4.36		1,630,005		18,027		4.33
Federal Home Loan Bank stock	3,133		16		2.04		7,835		77		3.91
Total earning assets	2,095,220		$	20,665	3.86	%	2,046,366		$	18,976	3.63	%
Other assets	131,670						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 market	824,203		1,053		0.51		517,638		859		0.66
Savings	182,848		96		0.21		163,135		237		0.58
Time	448,218		1,187		1.05		757,176		2,968		1.56
Total interest bearing deposits	1,567,082		2,387		0.60		1,525,839		4,104		1.07
Borrowed money	72,960		503		2.70		200,237		1,210		2.36
Total interest bearing liabilities	1,640,042		$	2,890	0.70	%	1,726,076		$	5,314	1.22	%
Noninterest bearing deposits	341,303						226,473
Other liabilities	52,552						53,272
Total Liabilities	2,033,897						2,005,821
Shareholders' equity	192,993						173,162

Total liabilities and shareholders' equity	$	2,226,890					$	2,178,983
Net interest income (2)			$	17,775					$	13,662
Interest rate spread					3.16	%					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.


	Nine Months Ended September 30,
	2021						2020

(Dollars in thousands)	Average Balance		Interest		Yield / Rate (4)		Average Balance		Interest		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 estate	1,188,049		40,802		4.53		1,094,956		38,460		4.61
Residential real estate	104,320		2,669		3.41		134,369		3,636		3.61
Construction	97,828		2,769		3.73		98,539		3,350		4.47
Commercial business	302,019		10,495		4.58		289,959		10,017		4.54
Consumer	7,601		226		3.97		130		8		8.15
Total loans	1,699,817		56,961		4.42		1,617,953		55,471		4.50
Federal Home Loan Bank stock	4,608		72		2.09		7,547		272		4.81
Total earning assets	2,122,719		$	59,634	3.70	%	1,929,319		$	58,500	3.98	%
Other assets	119,098						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 market	781,178		2,944		0.50		473,485		3,213		0.91
Savings	170,749		313		0.24		170,262		1,204		0.94
Time	532,278		4,840		1.22		721,051		10,107		1.87
Total interest bearing deposits	1,594,842		8,245		0.69		1,441,459		14,623		1.36
Borrowed money	108,737		2,280		2.77		187,177		3,187		2.24
Total interest bearing liabilities	1,703,579		$	10,525	0.83	%	1,628,636		$	17,810	1.46	%
Noninterest bearing deposits	303,421						201,384
Other liabilities	46,023						49,418
Total Liabilities	2,053,023						1,879,438
Shareholders' equity	188,794						175,838

Total liabilities and shareholders' equity	$	2,241,817					$	2,055,276
Net interest income (2)			$	49,109					$	40,690
Interest rate spread					2.87	%					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.

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)	Volume		Rate		Total		Volume		Rate		Total
Interest and dividend income:
Cash and Fed funds sold	$	(37)	$	29	$	(8)	$	176	$	(358)	$	(182)
Securities	66		(76)		(10)		148		(122)		26
Loans:
Commercial real estate	2,067		(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
Consumer	88		(1)		87		224		(6)		218
Total loans	1,754		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 income	1,749		(60)		1,689		3,305		(2,171)		1,134
Interest expense:
Deposits:
NOW	11		—		11		46		3		49
Money market	423		(229)		194		1,537		(1,806)		(269)
Savings	26		(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.

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)	2021		2020		$		%
Gains and fees from sales of loans	$	924	$	27	$	897	3,322.2	%
Bank-owned life insurance	271		242		29		12.0
Service charges and fees	199		190		9		4.7
Gain on sale of other real estate owned, net	—		19		(19)		(100.0)

Other	43		136		(93)		(68.4)
Total noninterest income	$	1,437	$	614	$	823	134.0	%


	Nine Months Ended September 30,				Change
(Dollars in thousands)	2021		2020		$		%
Gains and fees from sales of loans	$	2,251	$	27	$	2,224	8,237.0	%
Bank-owned life insurance	753		726		27		3.7
Service charges and fees	615		578		37		6.4
Gain on sale of other real estate owned, net	—		19		(19)		(100.0)

Other	1,213		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.

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)	2021		2020		$		%
Salaries and employee benefits	$	4,782	$	5,295	$	(513)	(9.7)	%
Occupancy and equipment	2,615		2,266		349		15.4
Data processing	632		529		103		19.5
Professional services	498		374		124		33.2
Director fees	324		301		23		7.6
FDIC insurance	298		176		122		69.3
Marketing	186		151		35		23.2
Other	1,035		637		398		62.5
Total noninterest expense	$	10,370	$	9,729	$	641	6.6	%


	Nine Months Ended September 30,				Change
(Dollars in thousands)	2021		2020		$		%
Salaries and employee benefits	$	13,511	$	15,902	$	(2,391)	(15.0)	%
Occupancy and equipment	8,271		6,410		1,861		29.0
Data processing	1,977		1,558		419		26.9
Professional services	1,632		1,519		113		7.4
FDIC insurance	1,001		529		472		89.2
Director fees	968		883		85		9.6
Marketing	317		512		(195)		(38.1)
Other	2,383		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.

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.

The following table compares the composition of our loan portfolio for the dates indicated:


(In thousands)	At September 30, 2021		At December 31, 2020		Change
Real estate loans:
Residential	$	90,110	$	113,557	$	(23,447)
Commercial	1,337,896		1,148,383		189,513
Construction	94,665		87,007		7,658
	1,522,671		1,348,947		173,724
Commercial business	292,825		276,601		16,224
Consumer	9,050		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.

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, 2021			At December 31, 2020
Nonaccrual loans:
Real estate loans:
Residential	$	1,849		$	1,492
Commercial	16,314			21,093
Commercial business	1,754			1,834
Construction	8,997			8,997
Total nonaccrual loans	28,914			33,416
Other real estate owned	—			—
Total nonperforming assets	$	28,914		$	33,416

Nonperforming assets to total assets	1.30		%	1.48		%
Nonaccrual loans to total gross loans	1.58		%	2.06		%
Total past due loans to total gross loans	1.69		%	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.

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)	2021			2020			2021			2020
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 business	11			—			27			1
Consumer	1			2			10			2
Total recoveries	12			2			37			3
Net charge-offs	(3)			(2)			(4,024)			(33)
Provision (credit) charged to earnings	134			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 loans	0.92		%	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, 2021				At December 31, 2020
(Dollars in thousands)	Amount		Percent of Loan Portfolio		Amount		Percent of Loan Portfolio
Residential real estate	$	476	4.94	%	$	610	6.99	%
Commercial real estate	13,246		73.33		16,425		70.64
Construction	142		5.19		221		5.35
Commercial business	2,903		16.05		3,753		17.02
Consumer	36		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.

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, 2021				December 31, 2020
(Dollars in thousands)	Amount		Percent		Amount		Percent
Noninterest bearing demand	$	338,705	17.99	%	$	270,235	14.79	%
NOW	103,180		5.48		101,737		5.57
Money market	835,210		44.36		669,364		36.63
Savings	188,581		10.02		158,750		8.69
Time	417,147		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, 2021		December 31, 2020
Maturing:
Within 3 months	$	92,640	$	141,784
After 3 but within 6 months	28,059		67,064
After 6 months but within 1 year	35,142		118,880
After 1 year	192,430		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.

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.

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 Ramp	Estimated Percent Change in Net Interest Income

Rate Changes (basis points)	September 30, 2021		December 31, 2020
-100	(0.80)	%	0.20	%
+200	(3.40)		(1.40)


Parallel Shock	Estimated Percent Change in Net Interest Income

Rate Changes (basis points)	September 30, 2021		December 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.

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, 2021		December 31, 2020
-100	(25.20)	%	(47.30)	%
+100	2.40		9.30
+200	2.20		13.80
+300	2.70		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.

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.

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, 2021	52,277	$	27.26	52,277	175,901
August 1, 2021 - August 31, 2021	—	—		—	175,901
September 1, 2021 - September 30, 2021	—	—		—	175,901
Total	52,277	$	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.

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

101			The 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.

104			Cover 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)

TABLE OF CONTENTS

Part 1 Financial Information Item 1. Financial Statements Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

Exhibits

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

BWFG 10-Q Quarter ended Sept. 30, 2021

Exhibits