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Item 7. Management’s Discussion and Analysis

2021-03-10 compared with 2020-02-28 · 282 added, 239 removed, 561 unchanged (48% of the section changed)

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Bankwell Financial Group, Inc.

is a bank holding company headquartered in New Canaan, Connecticut.

Through our wholly owned subsidiary, Bankwell Bank, we serve small and medium-sized businesses and retail customers in the New York metropolitan area and throughout Connecticut with the majority of our loans in Fairfield and New Haven Counties, Connecticut.

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 "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, "we", "our", "us", or 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 full range of banking services to commercial and consumer customers, primarily concentrated in the New York metropolitan area and throughout Connecticut, with the majority of the Company's loans in Fairfield and New Haven Counties, Connecticut, with branch locations in New Canaan, Stamford, Fairfield, Wilton, Westport, Darien, Norwalk, and Hamden, Connecticut.

The following discussion and analysis presents our results of operations and financial condition on a consolidated basis.

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

Strategic acquisitions;

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

• Utilization of efficient and scalable infrastructure;

• Disciplined focus on risk management.

On August 19, 2015, the Company completed a private placement of $25.5 million in aggregate principal amount of fixed rate subordinated notes (the “Notes”) to certain institutional investors.

The 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 or the early redemption date, August 2020 and annually thereafter.

On June 9, 2018, we opened three De Novo branches located in Darien, Westport, and Stamford, Connecticut, increasing our total number of branches to twelve.

Impact of COVID-19

The COVID-19 pandemic has resulted in, and is likely to continue to result in, significant economic disruption affecting our business and the clients we serve.

A significant degree of uncertainty still exists concerning the duration and magnitude of the COVID-19 pandemic.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on our business.

The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated.

For the year ended December 31, 2020, we increased the provision for loan losses and added liquidity to the balance sheet due to the impact of COVID-19, both of which adversely impacted our earnings and performance metrics.

The primary measures we use to evaluate and manage our financial results are set forth in the table below.

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The following table sets forth the key financial measures we use to evaluate the success of our business and our financial position and operating performance.

Net income for the year ended December 31, 2017 was negatively impacted by the Tax Cuts and Jobs Act of 2017 as it relates to legislation that required a re-measurement of our deferred tax asset, which required a $3.3 million write-off recognized as a direct increase to income tax expense.

As a result, the performance metrics presented below have been adversely impacted due to the decline in net income driven by this write-off.

Key Financial Measures

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At or For the Years Ended December 31,

2020 2019 2018

(Dollars in thousands, except per share data)

Selected balance sheet measures:

Total assets $ 2,253,747 $ 1,882,182 $ 1,873,665

Gross portfolio loans 1,625,627 1,604,484 1,604,726

Deposits 1,827,316 1,491,903 1,502,244

FHLB borrowings 175,000 150,000 160,000

Subordinated debt 25,258 25,207 25,155

Total equity 176,602 182,397 174,196

Selected statement of income measures:

Total revenue (c)

57,719 59,005 60,226

Net interest income before provision for loan losses 54,835 53,761 56,326

Income before income tax expense 7,301 22,942 21,153

Net income 5,904 18,216 17,433

Basic earnings per share $ 0.75 $ 2.32 $ 2.23

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At or For the Years Ended December 31,

2020 2019 2018

Other financial measures and ratios:

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Return on average common shareholders’ equity (c)

3.35 % 10.20 % 10.19 %

Net interest margin 2.77 % 3.03 % 3.18 %

Efficiency ratio (c)

73.9 % 60.2 % 59.2 %

Tangible book value per share (end of period) (c)(d)

$ 22.43 $ 23.15 $ 22.06

Net charge-offs to average loans (b)

0.01 % 0.15 % 0.44 %

Nonperforming assets to total assets (e)

1.48 % 0.56 % 0.75 %

Allowance for loan losses to nonperforming loans 62.87 % 127.59 % 109.80 %

Allowance for loan losses to total loans (b)

We have derived the selected balance sheet measures as of December 31, 2019 and 2018 and the selected statement of income measures for the years ended December 31, 2019, 2018 and 2017 from our audited consolidated financial statements included elsewhere in this annual report.

1.29 % 0.84 % 0.96 %

(a) We derived the selected balance sheet measures as of December 31, 2020 and 2019 and the selected statement of income measures for the years ended December 31, 2020, 2019 and 2018 from our audited consolidated financial statements included elsewhere in this annual report.

Average balances have been computed using daily averages.

Our historical results may not be indicative of our results for any future period.

Calculated using the principal amounts outstanding on loans.

This measure is not a measure recognized under GAAP and is therefore considered to be a non-GAAP financial measure.

(b) Calculated using the principal amounts outstanding on loans.

See “Non-GAAP Financial Measures” for a description of this measure and a reconciliation of this measure to its most directly comparable GAAP measure.

Excludes unvested restricted stock awards.

Nonperforming assets consist of nonperforming loans and other real estate owned.

(d) Excludes unvested restricted stock awards.

(e) Nonperforming assets consist of nonperforming loans and other real estate owned.

Critical Accounting Policies and Estimates

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We analyze historical loss experience over periods deemed to be relevant to the inherent risk of loss in loan portfolios as of the balance sheet date.

During 2017, we updated our allowance methodology and underlying loan loss assumptions, incorporating recent industry and product loss trends.

This resulted in a non-recurring pretax $1.3 million reduction in the allowance and increase in earnings.

Loss allocations for non-impaired loans are based on an internal rating system and the application of loss allocation factors.

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The Company has characterized all of its interest rate swaps that qualify under ASC Topic 815 hedge accounting as cash flow hedges.

Cash flow hedges are used to minimize the variability in cash flows of assets or liabilities, or forecasted transactions caused by interest rate fluctuations, and are recorded at fair value in other assets within the consolidated balance sheet.

Cash flow hedges are used to minimize the variability in cash flows of assets or liabilities, or forecasted transactions caused by fluctuations in the contractually specified interest rates, and are recorded at fair value in other assets within the consolidated balance sheet.

Changes in the fair value of these cash flow hedges are initially recorded in accumulated other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings.

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2020 Earnings Overview

Our net income for the year ended December 31, 2019 was $18.2 million , an increase of $0.8 million , or 4.5% , compared to the year ended December 31, 2018.

Net income available to common shareholders for the year ended December 31, 2019 was $18.2 million , or $2.31 per diluted share, compared to net income available to common shareholders of $17.4 million, or $2.21 per diluted share for the year ended December 31, 2018.

Our returns on average shareholders' equity and average assets for the year ended December 31, 2019, were 10.20% and 0.97%, respectively, compared to 10.19% and 0.94%, respectively for the year ended December 31, 2018.

The increase in net income for 2019 compared to 2018 was primarily due to elevated loan prepayments and a decline in loan charge-offs in 2019 when compared to 2018.

Net interest income for the year ended December 31, 2019 was $53.8 million , a decrease of $2.6 million compared to the year ended December 31, 2018.

Our net interest margin decreased 15 basis points to 3.03% for the year ended December 31, 2019 compared to the year ended December 31, 2018 reflecting higher rates on interest bearing deposits.

The decline in the net interest margin was partially offset by incremental fees from loan prepayments.

Our efficiency ratio was 60.2% for the year ended December 31, 2019 compared to 59.2% for the year ended December 31, 2018.

The increase in the efficiency ratio was primarily a result of decreased revenues when compared to the year ended December 31, 2018.

2018 Earnings Overview

Our net income for the year ended December 31, 2018 was $17.4 million, an increase of $3.6 million, or 26.1%, compared to the year ended December 31, 2017.

Net income available to common shareholders for the year ended December 31, 2018, was $17.4 million, or $2.21 per diluted share, compared to net income available to common shareholders of $13.8 million, or $1.78 per diluted share, for the year ended December 31, 2017.

Our net income for the year ended December 31, 2020 was $5.9 million, a decrease of $12.3 million, or 67.6%, compared to the year ended December 31, 2019.

Diluted earnings per share was $0.75 for the year ended December 31, 2020, compared to diluted earnings per share of $2.31 for the year ended December 31, 2019.

Our returns on average shareholders' equity and average assets for the year ended December 31, 2020, were 3.35% and 0.28%, respectively, compared to 10.20% and 0.97%, respectively for the year ended December 31, 2019.

The increase in net income for 2018 compared to 2017 was primarily a result of higher net interest income and income tax expense savings resulting from the tax law change enacted in 2017.

The decrease in net income for 2020 compared to 2019 was impacted by a $3.9 million one-time charge for office consolidation, vendor contract termination and employee severance costs recognized in the fourth quarter of 2020.

In addition, the decrease in net income was also due to an increase in the provision for loan losses due to the COVID-19 pandemic.

provision for loan losses totaled $7.6 million for the year ended December 31, 2020, consisting of COVID-19 related reserves of $9.0 million, partially offset due to changes in portfolio mix and growth.

Net interest income for the year ended December 31, 2020 was $54.8 million, an increase of $1.1 million compared to the year ended December 31, 2019.

Our net interest margin decreased 12 basis points to 3.18% for the year ended December 31, 2018 compared to the year ended December 31, 2017 reflecting higher rates on interest bearing deposits driven by rate increases in our competitive marketplace.

Our efficiency ratio was 59.2% for the year ended December 31, 2018 compared to 54.9% for the year ended December 31, 2017.

The increase in the efficiency ratio was driven by slower growth in net interest income and an increase in noninterest expense associated with the opening of three new branches during the second quarter of 2018, as well as a number of non-recurring expenses recognized in the first quarter of 2018 that caused our efficiency ratio to temporarily jump to 62.0%.

Our net interest margin decreased 26 basis points to 2.77% for the year ended December 31, 2020 compared to the year ended December 31, 2019 reflecting excess liquidity resulting from successful commercial core deposit gathering efforts as well as a temporary increase in other deposits to expand on-balance sheet liquidity during the COVID-19 pandemic.

2019 Earnings Overview

Reference the 2019 Form 10-K for discussion regarding financial performance and results for the year ended December 31, 2019 compared to the year ended December 31, 2018.

Results of Operations

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FTE net interest income for the years ended December 31, 2020 and 2019 was $55.0 million and $54.0 million, respectively.

Net interest income decreased due to higher rates on interest bearing deposits.

FTE basis interest income for the year ended December 31, 2019 increased by $2.9 million to $83.2 million , or 4%, compared to FTE basis interest income for the year ended December 31, 2018 due primarily to fees recognized from elevated loan prepayments.

Loan prepayment fees totaled $2.7 million for the year ended December 31, 2019 compared to $1.3 million for the same period in 2018.

Average interest earning assets were $1.8 billion for the year ended December 31, 2019, decreasing by $2.6 million, or 0.1%, from the year ended December 31, 2018.

The average balance of total loans decreased $2.8 million, or 0.2%.

Net interest income increased due to lower rates on interest bearing deposits.

FTE basis interest income for the year ended December 31, 2020 decreased $5.5 million, or 7%, to $77.7 million compared to FTE basis interest income for the year ended December 31, 2019 due primarily to lower loan yields as loans were re-priced in the current low interest rate environment.

Average interest earning assets were $2.0 billion for the year ended December 31, 2020, increasing by $206.4 million, or 11.6%, from the year ended December 31, 2019 due to an increase in cash and cash equivalents in part to maintain a higher level of liquidity during the COVID-19 pandemic.

The average balance of total loans increased $43.7 million, or 2.8%.

The total average balance of securities for the year ended December 31, 2020 decreased by $13.4 million, or 12%, from the year ended December 31, 2019.

The total yield in earnings assets increased to 4.61% at December 31, 2019, compared to 4.45% at December 31, 2018.

The increase in yield was primarily driven by an increase in income earned resulting from loan prepayments.

Interest expense for the year ended December 31, 2019 increased by $5.4 million , or 23% , compared to interest expense for 2018 due to an increase in rates on interest bearing deposits.

Although deposit costs started to decline in the second half of 2019, the weighted average cost of deposits for all of 2019 increased 40 basis points to 1.87% due to an increase in market rates and our desire to attract additional deposits.

The weighted average cost of borrowed money increased by 32 basis points to 2.53% .

Average interest bearing liabilities for the year ended December 31, 2019 decreased by $7.7 million, or 0.5%, from the year ended December 31, 2018, primarily due to lower average balances in borrowed money.

Year ended December 31, 2018 compared to year ended December 31, 2017

FTE net interest income for the years ended December 31, 2018 and 2017 was $56.6 million and $55.0 million, respectively.

Net interest income increased due to higher yields and an increase in earning assets offset by higher rates and volume on interest bearing deposits.

FTE basis interest income for the year ended December 31, 2018 increased by $8.5 million to $80.3 million, or 12%, compared to FTE basis interest income for the year ended December 31, 2017 due primarily to growth in higher yielding interest earning assets, specifically, loan growth and yield increases in our commercial real estate and commercial business portfolios.

Average interest earning assets were $1.8 billion for the year ended December 31, 2018, increasing by $115.5 million, or 7%, from the year ended December 31, 2017.

The average balance of total loans increased $112.6 million, or 8%, contributing $7.9 million to the increase in interest income.

The total average balance of securities for the year ended December 31, 2018 increased by $9.5 million, or 9%, from the year ended December 31, 2017.

The total yield in earnings assets increased to 4.45% at December 31, 2018, compared to 4.25% at December 31, 2017.

The increase in yield was primarily driven by an increase in rates on loans and an increase in income earned resulting from loan prepayments.

Interest expense for the year ended December 31, 2018, increased by $6.9 million, or 41%, compared to interest expense for 2017 due to an increase in volume and increases in rates on interest bearing deposits driven by rate increases in our competitive marketplace.

The weighted average cost of deposits increased 41 basis points to 1.47% due to an increase in market rates and our desire to attract additional deposits.

The weighted average cost of borrowed money increased by 11 basis points to 2.21%.

Average interest bearing liabilities for the year ended December 31, 2018 increased by $106.9 million, or 8%, from the year ended December 31, 2017, primarily due to higher average balances in money market and savings accounts.

The total yield in earnings assets decreased to 3.85% at December 31, 2020, compared to 4.61% at December 31, 2019.

The decrease in yield was primarily driven by a significant increase in cash and cash equivalents and lower yields on cash and cash equivalents and loans.

Interest expense for the year ended December 31, 2020 decreased by $6.5 million, or 22%, compared to interest expense for 2019 due to a decrease in rates on interest bearing deposits.

The weighted average cost of borrowed money decreased by 22 basis points to 2.31%.

Average interest bearing liabilities for the year ended December 31, 2020 increased by $177.3 million, or 12%, from the year ended December 31, 2019, primarily due to higher average balances in money market and time deposits.

Distribution of Assets, Liabilities and Stockholders’ Equity;

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Years Ended December 31,

2020 2019 2018

Balance Interest Yield/

(Dollars in thousands)

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Securities (1)

98,938 3,103 3.14 112,336 3,526 3.14 118,311 3,686 3.12

Commercial real estate 1,095,367 51,218 4.60 1,067,290 50,818 4.70 1,014,255 47,967 4.66

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Construction (2)

97,230 4,262 4.31 85,591 4,538 5.23 90,773 4,667 5.07

Commercial business 295,662 13,530 4.50 255,779 15,599 6.01 282,425 15,037 5.25

Consumer 121 10 8.00 258 17 6.70 481 28 5.88

Total loans 1,617,965 73,665 4.48 1,574,302 77,339 4.85 1,577,055 74,715 4.67

Federal Home Loan Bank stock 7,625 346 4.53 7,502 473 6.31 9,177 517 5.63

Total earning assets 1,986,217 $ 77,699 3.85 % 1,779,818 $ 83,197 4.61 % 1,782,466 $ 80,346 4.45 %

Other assets 125,261 92,663 68,002

Total assets $ 2,111,478 $ 1,872,481 $ 1,850,468

Liabilities and shareholders’ equity:

Interest bearing liabilities:

NOW $ 80,805 $ 141 0.17 % $ 62,254 $ 128 0.21 % $ 60,410 $ 157 0.26 %

Money market 516,527 4,071 0.79 439,867 7,139 1.62 482,886 6,431 1.33

Savings 169,763 1,368 0.81 177,854 2,968 1.67 124,214 1,649 1.33

Time 712,461 12,600 1.77 637,515 14,463 2.27 619,448 10,714 1.73

Total interest bearing deposits 1,479,556 18,180 1.23 1,317,490 24,698 1.87 1,286,958 18,951 1.47

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Net interest income (3)

$ 55,047 $ 54,010 $ 56,608

Interest rate spread 2.49 % 2.65 % 2.87 %

Net interest margin (4)

2.77 % 3.03 % 3.18 %

(1) Average balances and yields for securities are based on amortized cost.

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(3) The adjustment for securities and loans taxable equivalency was $212 thousand, $249 thousand and $282 thousand, respectively, for the years ended December 31, 2020, 2019 and 2018.

Tax exempt income was converted to a fully taxable equivalent basis at a 20 percent tax rate for 2019 and 2018 and a 30 percent tax rate for 2017.

Tax exempt income was converted to a fully taxable equivalent basis at a 20 percent tax rate for 2020, 2019 and 2018.

(4) Net interest income as a percentage of total earning assets.

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December 31, 2020 vs 2019

Increase (Decrease)

Increase (Decrease) Year Ended

December 31, 2019 vs 2018

Increase (Decrease)

Volume Rate Total Volume Rate Total

(In thousands)

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Cash and fed funds sold $ 1,435 $ (2,709) $ (1,274) $ 152 $ 279 $ 431

Securities (420) (3) (423) (187) 27 (160)

Commercial real estate 1,321 (921) 400 2,523 328 2,851

Residential real estate (1,306) (416) (1,722) (906) 257 (649)

Construction 570 (846) (276) (272) 143 (129)

Commercial business 2,201 (4,270) (2,069) (1,498) 2,060 562

Consumer (10) 3 (7) (15) 4 (11)

Total loans 2,776 (6,450) (3,674) (168) 2,792 2,624

Federal Home Loan Bank stock 8 (135) (127) (101) 57 (44)

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Interest expense:

NOW $ 34 $ (21) $ 13 $ 5 $ (34) $ (29)

Money market 1,082 (4,150) (3,068) (609) 1,317 708

Savings (130) (1,470) (1,600) 827 492 1,319

Time 1,570 (3,433) (1,863) 321 3,428 3,749

Total deposits 2,556 (9,074) (6,518) 544 5,203 5,747

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The provision for loan losses for the year ended December 31, 2020 was $7.6 million compared to a $0.4 million provision for loan losses for the year ended December 31, 2019.

The decrease in the provision for loan losses was largely driven by a decline in loan charge-offs in 2019 when compared to 2018.

The increase in the provision for loan losses was primarily due to incremental loan loss reserves for increased credit risk relating to economic disruption and uncertainty caused by the COVID-19 pandemic.

Noninterest Income

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The following table compares noninterest income for the years ended December 31, 2020, 2019 and 2018.

December 31, 2020/2019

Change 2019/2018

2020 2019 2018 $ % $ %

(Dollars in thousands)

Gains and fees from sales of loans

Service charges and fees

Bank owned life insurance $ 967 $ 1,008 $ 1,057 $ (41) (4) % $ (49) (5) %

Service charges and fees 788 1,023 1,090 (235) (23) (67) (6)

Gains and fees from sales of loans 43 1,791 984 (1,748) (98) 807 82

Gain (loss) on sale of other real estate owned, net 19 (102) — 121 (119) (102) N/A

Net gain on sale of available for sale securities — 76 222 (76) (100) (146) (66)

Loss on sale of other real estate owned, net

Other 1,067 1,448 547 (381) (26) 901 165

Total noninterest income $ 2,884 $ 5,244 $ 3,900 $ (2,360) (45) % $ 1,344 34 %

Year ended December 31, 2020 compared to year ended December 31, 2019

Noninterest income totaled $5.2 million for the year ended December 31, 2019, compared to $3.9 million for the year ended December 31, 2018.

The increase in noninterest income was primarily driven by an increase in gains and fees from the sales of loans and to a lesser degree loan related interest rate swap fees recorded in other income.

Gains and fees from sales of loans.

During the year ended December 31, 2019, the Company recorded $1.8 million in gains and fees from sales of loans.

For the year ended December 31, 2018, gains and fees from sales of loans totaled $1.0 million .

The increase was driven by a higher volume of loans sold for the year ended December 31, 2019 compared to the same period in 2018.

We recorded other income of $1.4 million during the year ended December 31, 2019, an increase of $0.9 million compared to the year ended December 31, 2018.

The increase is primarily related to loan related interest rate swap fees.

Year ended December 31, 2018 compared to year ended December 31, 2017

Noninterest income totaled $3.9 million for the year ended December 31, 2018, compared to $4.6 million for the year ended December 31, 2017.

The decrease in noninterest income was primarily driven by a decline in gains and fees from sales of loans and other income.

Gains and fees from sales of loans.

The Company recorded $1.0 million in gains and fees from sales of loans for the year ended December 31, 2018, a decrease of $0.4 million compared to the year ended December 31, 2017.

The decrease is primarily driven by the absence of refining the model assumptions used in calculating a servicing asset in 2017, partially offset by an increase in the gains realized on the sale of loans in 2018 as compared to 2017.

We recorded other income of $0.5 million for the year ended December 31, 2018, a decrease of $0.4 million compared to the year ended December 31, 2017.

The decrease is primarily related to a valuation allowance on servicing assets of $0.2 million recognized in the fourth quarter of 2018 and increased amortization on servicing assets.

Noninterest income decreased by $2.4 million to $2.9 million for the year ended December 31, 2020, compared to the year ended December 31, 2019.

The decrease in noninterest income was primarily a result of the absence of gains and fees from SBA loan sales for the year ended December 31, 2020, when compared to the same period in 2019.

In addition, for the year ended December 31, 2020, the decrease in noninterest income was also driven by certain waived service charges and fees on depository accounts as a courtesy to customers during the COVID-19 pandemic.

The decrease in other noninterest income for the year ended December 31, 2020 was primarily a result of a decline in loan related interest rate swap fees in 2020, when compared to the same period in 2019.

Noninterest Expense

The following table compares noninterest expense for the years ended December 31, 2020, 2019 and 2018.

December 31, 2020/2019

Change 2019/2018

2020 2019 2018 $ % $ %

(Dollars in thousands)

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Director fees 1,214 863 1,044 351 41 (181) (17)

Amortization of intangibles

FDIC insurance 791 74 779 717 969 (705) (91)

Marketing 630 971 1,587 (341) (35) (616) (39)

Other 2,571 2,766 2,324 (195) (7) 442 19

Total noninterest expense $ 42,813 $ 35,626 $ 35,633 $ 7,187 20 % $ (7) — %

Year ended December 31, 2020 compared to year ended December 31, 2019

Noninterest expense remained flat, totaling $35.6 million for the years ended December 31, 2019 and 2018.

Salaries and employee benefits .

Salaries and employee benefits increased by $0.5 million , or 2% , for the year ended December 31, 2019 compared to the year ended December 31, 2018, largely reflecting an increase in full time equivalent employees and a reduction in deferred loan origination costs.

Average full time equivalent employees totaled 150 in 2019 compared to 144 in 2018.

Occupancy and equipment.

Occupancy and equipment expense increased by $0.8 million , or 12% , for the year ended December 31, 2019, compared to the year ended December 31, 2018.

The increase was primarily associated with a full year of expenses from the prior year's branch expansion and additional investment in technology.

FDIC Insurance.

FDIC insurance expense decreased $0.7 million for the year ended December 31, 2019 compared to the same period in 2018 driven by a credit received during the quarter ended September 30, 2019.

Year ended December 31, 2018 compared to year ended December 31, 2017

Noninterest expense was $35.6 million for the year ended December 31, 2018, compared to $32.5 million for the year ended December 31, 2017.

The increase of $3.1 million , or 10% , was primarily driven by an increase in salaries and employee benefits and occupancy and equipment expenses.

Salaries and employee benefits .

Salaries and employee benefits increased by $2.7 million , or 17% , for the year ended December 31, 2018 compared to the year ended December 31, 2017, largely reflecting an increase in full time equivalent employees and a reduction in deferred loan origination costs as a result of lower loan volume.

The increase in full time equivalent employees is in line with year over year business growth and driven by staffing for the three new branch locations.

Average full time equivalent employees totaled 144 in 2018 compared to 134 in 2017.

Occupancy and equipment.

Occupancy and equipment expense increased by $0.6 million , or 10% , for the year ended December 31, 2018 compared to the year ended December 31, 2017.

The increase in occupancy and equipment expense was primarily driven by expenditures associated with the opening of the new branch locations and improvements of existing infrastructure.

Noninterest expense increased by $7.2 million, or 20%, to $42.8 million for the year ended December 31, 2020 compared to the year ended December 31, 2019.

The increase in noninterest expense was primarily driven by $3.9 million in one-time charges recognized during the fourth quarter of 2020.

These one-time charges impacted salaries and employee benefits, occupancy and equipment expense and data processing expense.

Salaries and employee benefits totaled $21.4 million for the year ended December 31, 2020, an increase of $1.9 million when compared to the same period in 2019.

The increase in salaries and employee benefits was primarily driven by a $0.8 million expense for the Voluntary Early Retirement Incentive Plan offered to eligible employees and additional severance charges recognized during the fourth quarter of 2020.

The increase in salaries and employee benefits was also driven by normal annual salary increases and key hires in support of growth initiatives, partially offset by a reduction in overall headcount.

Occupancy and equipment expense totaled $10.9 million for the year ended December 31, 2020, an increase of $3.3 million when compared to the same period in 2019.

The increase in occupancy and equipment expense was primarily due to a $2.0 million one-time expense related to office and branch consolidation recognized during the fourth quarter of 2020.

The $2.0 million one-time expense included a charge of $1.7 million recognized upon the transfer of a bank owned property to held for sale.

The asset transferred to held for sale was written down to its fair market value, less cost to sell.

In addition, the $2.0 million one-time expense included a $0.3 million impairment charge on a leased asset.

In addition, the increase in occupancy and equipment expense was due to additional cleaning costs associated with precautions taken to prevent the spread of COVID-19.

Data processing expense totaled $3.2 million for the year ended December 31, 2020, an increase of $1.1 million when compared to the same period in 2019.

The increase in data processing expense was primarily driven by a $1.1 million one-time charge related to early termination fees payable to a legacy technology vendor.

Income tax expense for the years ended December 31, 2020, 2019 and 2018 totaled $1.4 million, $4.7 million and $3.7 million, respectively.

The effective tax rates for the years ended December 31, 2020, 2019 and 2018, were 19.1%, 20.6% and 17.6%, respectively.

The decrease in the effective tax rate for the year ended December 31, 2018 was primarily due to the tax law change enacted in 2017.

Our net deferred tax asset at December 31, 2020 was $11.3 million, compared to $5.8 million at December 31, 2019.

The increase in the deferred tax asset at December 31, 2019 is primarily a result of unrealized losses on derivatives.

On October 8, 2015, the Bank established a new wholly-owned subsidiary, Bankwell Loan Servicing Group, Inc.

The increase in the deferred tax asset at December 31, 2020 when compared to the same period in 2019 was primarily a result of an increase in the allowance for loan losses and unrealized losses on derivatives.

On October 8, 2015, the Bank established a wholly-owned subsidiary, Bankwell Loan Servicing Group, Inc.

(a Passive Investment Company “PIC”).

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Financial Condition

Total assets and gross loans remained relatively flat for the period ended December 31, 2019 when compared to the same period in 2018, totaling $1.9 billion and $1.6 billion , respectively.

However, gross loans grew at an annualized rate of 10% during the fourth quarter of 2019 when compared to the third quarter of 2019.

Total liabilities also remained relatively flat at December 31, 2019 when compared to the same period in 2018, totaling $1.7 billion .

However, deposits grew at an annualized rate of 6% during the fourth quarter of 2019 when compared to the third quarter of 2019, which includes strong growth in noninterest bearing deposits.

Shareholders’ equity totaled $182.4 million at December 31, 2019, an increase of $8.2 million compared to December 31, 2018, largely due to net income for the year ended December 31, 2019 of $18.2 million , offset by dividends paid of $4.1 million , stock repurchases of $1.0 million and a $6.5 million unfavorable impact to accumulated other comprehensive income, driven by fair value marks related to hedge positions involving interest rate swaps.

The interest rate swaps are primarily used to hedge interest rate risk in relation to our funding sources.

The Company's current derivative positions will cause a decrease in other comprehensive income in a falling interest rate environment and an increase in a rising interest rate environment.

The Bank exceeded the regulatory minimum capital levels to be considered well-capitalized with total risk-based capital of 13.35% , tier 1 risk-based capital of 12.53% and tier 1 capital to average assets ratio of 10.99% at December 31, 2019.

Assets totaled $2.3 billion at December 31, 2020, compared to assets of $1.9 billion at December 31, 2019.

The increase in assets is primarily due to an increase in cash and cash equivalents in part to maintain a higher level of liquidity during the COVID-19 pandemic.

Gross loans totaled $1.6 billion at December 31, 2020, an increase of $21.1 million compared to December 31, 2019.

Excluding Paycheck Protection Program ("PPP") loans, gross loans decreased by $13.7 million at December 31, 2020 when compared to December 31, 2019.

Deposits totaled $1.8 billion at December 31, 2020, compared to deposits of $1.5 billion at December 31, 2019.

The increase in deposits was a result of successful commercial core deposit gathering efforts and a temporary increase in deposits to expand on-balance sheet liquidity during the COVID-19 pandemic.

Shareholders’ equity totaled $176.6 million as of December 31, 2020, a decrease of $5.8 million compared to December 31, 2019, primarily a result of an $8.1 million unfavorable impact to accumulated other comprehensive loss driven by fair value marks related to hedge positions involving interest rate swaps, as well as dividends paid of $4.4 million and common stock repurchases of $1.0 million.

The decrease was partially offset by net income for the year ended December 31, 2020 of $5.9 million.

The marks on the interest rate swaps are driven by lower long term market interest rates in 2020 when compared to 2019.

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.

Loan Portfolio

3 unchanged sentences

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

2020 2019 Change

Total % Total % Total

(Dollars in thousands)

Real estate loans:

Residential $ 113,557 6.99 % $ 147,109 9.17 % $ (33,552)

Commercial 1,148,383 70.64 1,128,614 70.34 19,769

Construction 87,007 5.35 98,583 6.14 (11,576)

1,348,947 82.98 1,374,306 85.65 (25,359)

Commercial business 276,601 17.02 230,028 14.34 46,573

Consumer 79 — 150 0.01 (71)

Total loans $ 1,625,627 100.00 % $ 1,604,484 100.00 % $ 21,143

Primary loan categories

7 unchanged sentences

Construction.

Construction loans were $98.6 million at December 31 2019, up $25.4 million from December 31, 2018.

Construction loans were $87.0 million at December 31 2020, down $11.6 million from December 31, 2019.

Construction loans totaled $98.6 million at December 31, 2019.

1 unchanged sentence

Commercial business.

Commercial business loans were $230.0 million and represented 14% of our total loan portfolio at December 31, 2019, compared to $259.0 million and 16% of the total portfolio at December 31, 2018.

Commercial business loans were $276.6 million and represented 17% of our total loan portfolio at December 31, 2020, a net increase of $46.6 million, or 20.2%, from December 31, 2019.

The December 31, 2020 balance includes $34.8 million of PPP loans made under the Coronavirus Aid, Relief and Economic Security Act ("CARES Act").

Commercial business loans primarily provide working capital, equipment financing, financing for leasehold improvements and financing for expansion and are generally secured by assignments of corporate assets, real estate and personal guarantees of the business owners.

3 unchanged sentences

December 31, 2020

Real Estate Commercial

Construction Commercial

Business Total

(In thousands)

4 unchanged sentences

Total due after one year 1,065,726 60,643 259,754 1,386,123

Total $ 1,148,383 $ 87,007 $ 276,601 $ 1,511,991

The following table presents an analysis of the interest rate sensitivity of our commercial real estate, commercial construction and commercial business loan portfolios due after one year as of December 31, 2020.

December 31, 2020

Interest Rate

Fixed Interest

Interest Rate Fixed Interest

(In thousands)

9 unchanged sentences

These committees report the results of their 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.

In addition, our Board of Directors receives information concerning asset quality measurements and trends on a periodic 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 regional or national scale.

Decreases in real estate values

could adversely affect the value of property used as collateral for loans.

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.

25 unchanged sentences

At December 31,

2020 2019 2018 2017 2016

(Dollars in thousands)

1 unchanged sentence

Real estate loans:

Residential $ 1,492 $ 1,560 $ 3,812 $ 1,590 $ 1,612

Commercial 21,093 5,222 5,950 3,371 446

Commercial business 1,834 3,806 4,320 520 538

Construction 8,997 — — — —

Consumer — — — — 341

Total nonaccrual loans 33,416 10,588 14,082 5,481 2,937

4 unchanged sentences

Total past due loans to total loans 0.93 % 0.77 % 0.78 % 1.67 % 0.47 %

Nonperforming assets and Nonaccrual loans totaled $10.6 million and represented 0.56% of total assets at December 31, 2019, compared to $14.1 million and 0.75% of total assets at December 31, 2018.

The Company continues to work on the resolution of the previously disclosed large nonperforming lending relationship.

Progress to date has been in line with the Company's estimates and, during the fourth quarter of 2019, the Company submitted a claim to the Small Business Administration ("SBA") to recover the remaining balance of $1.9 million, representing 10 basis points of the total nonperforming assets to total assets ratio of 0.56%.

The allowance for loan losses was $13.5 million , representing 0.84% of total gross loans at December 31, 2019 and $15.5 million, representing 0.96% of total gross loans at December 31, 2018.

There was no other real estate owned at December 31, 2019 or 2018.

Total nonaccrual loans were $33.4 million as of December 31, 2020, of which $2.6 million are guaranteed by the Small Business Administration ("SBA").

The Company individually analyzed all existing COVID-19 deferrals and COVID-19 impacted loans for collectability as of December 31, 2020, resulting in a $25.6 million increase to the nonperforming loan population which are adequately reserved.

Nonperforming assets as a percentage of total assets was 1.48% at December 31, 2020, up from 0.56% at December 31, 2019.

The allowance for loan losses at December 31, 2020 was $21.0 million, representing 1.29% of total loans.

The $7.5 million increase in the allowance for loan losses at December 31, 2020 when compared to December 31, 2019 was primarily due to incremental loan loss reserves for increased credit risk relating to economic disruption and uncertainty caused by the COVID-19 pandemic.

Nonaccrual Loans .

Loans greater than 90 days past due are put on nonaccrual status (excluding certain acquired credit impaired loans).

Loans greater than 90 days past due are generally put on nonaccrual status (excluding certain acquired credit impaired loans).

Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful.

6 unchanged sentences

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 90t h day of delinquency, the Company may take other appropriate legal action.

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.

2 unchanged sentences

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 are met.

The following table presents past due loans as of December 31, 2020 and 2019:

30–59 Days Past Due

60–89 Days Past Due

90 Days or Greater Past Due

Total Past Due

30–59 Days Past Due 60–89 Days Past Due 90 Days or Greater Past Due Total Past Due

(In thousands)

2 unchanged sentences

Commercial real estate 1,305 193 2,541 4,039

Construction 8,997 — — 8,997

Commercial business 45 55 1,526 1,626

Total loans $ 10,592 $ 248 $ 4,244 $ 15,084

As of December 31, 2019

1 unchanged sentence

Commercial real estate 355 — 5,935 6,290

Construction 1,357 — — 1,357

Commercial business — — 3,455 3,455

Total loans $ 1,712 $ 943 $ 9,671 $ 12,326

Troubled Debt Restructurings (TDR) .

2 unchanged sentences

The decision to restructure a loan, rather than aggressively enforcing the collection of the loan, may benefit us by increasing the ultimate probability of collection.

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.

As of December 31, 2020, the Company had active COVID-19 related deferrals totaling $29.4 million (excluding SBA loans, which are paid for 6 months by the SBA on behalf of borrowers).

The Company granted initial three month payment deferral periods and, in some instances, extended the initial payment deferral period.

This excludes SBA loans, which are mandated to receive an automatic six month deferral.

These deferrals are not considered troubled debt restructurings based on Section 4013 of the CARES Act and interagency guidance issued in March of 2020.

Restructured loans are classified as accruing or nonaccruing based on management’s assessment of the collectability of the loan.

1 unchanged sentence

Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term.

At December 31, 2019 and December 31, 2018 there were three nonaccrual loans identified as TDRs totaling $1.6 million and six nonaccrual loans identified as TDRs totaling $3.6 million , respectively.

At December 31, 2020 and December 31, 2019 there were three nonaccrual loans identified as TDRs totaling $1.4 million and three nonaccrual loans identified as TDRs totaling $1.6 million, respectively.

The following table presents information on troubled debt restructured loans:

At December 31,

2020 2019 2018 2017 2016

(In thousands)

28 unchanged sentences

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.

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:

At December 31,

2020 2019 2018 2017 2016

(Dollars in thousands)

2 unchanged sentences

Commercial real estate — (594) (5,614) — —

Construction — — — — (7)

Commercial business (83) (897) (815) (521) (69)

Consumer (40) (75) (77) (51) (35)

Total charge-offs (123) (2,441) (6,926) (572) (111)

1 unchanged sentence

Commercial real estate 15 — 18 — —

Consumer 3 32 7 3 10

Commercial Business — 19 19 4 —

Total recoveries 18 51 44 153 10

Net (charge-offs) recoveries

Net charge-offs (105) (2,390) (6,882) (419) (101)

Provision charged to earnings 7,605 437 3,440 1,341 3,914

3 unchanged sentences

At December 31, 2020, our allowance for loan losses was $21.0 million and represented 1.29% of total loans, compared to $13.5 million and 0.84% of total loans at December 31, 2019.

The decrease in the ratio of allowance for loan losses to total loans is driven by improving historical loss trends in the peer group data used in our allowance for loan losses model.

The increase in the ratio of allowance for loan losses to total loans is driven by incremental loan loss reserves for increased credit risk relating to economic disruption and uncertainty caused by the COVID-19 pandemic.

The Company individually analyzed all existing COVID-19 deferrals and COVID-19 impacted loans for collectability as of December 31, 2020.

For the years ended December 31, 2020, 2019 and 2018, the provision for loan losses charged to earnings totaled $7.6 million, $0.4 million and $3.4 million, respectively.

Net charge-offs for the year ended December 31, 2020 were $0.1 million and represented 0.01% of average loans.

For the year ended December 31, 2018, net charge-offs were $6.9 million and represented 0.44% of average loans, primarily reflecting $5.6 million of charge-offs of commercial real estate loans.

The decrease in net charge-offs was primarily a result of a charge-off totaling $6.2 million recognized in the fourth quarter of 2018 attributable to one lending relationship.

For the year ended December 31, 2019, net charge-offs were $2.4 million and represented 0.15% of average loans.

The carrying amount of total impaired loans at December 31, 2020 was $47.7 million.

3 unchanged sentences

At December 31,

2020 2019 2018 2017 2016

Amount Percent of

Portfolio Amount Percent of

(Dollars in thousands)

1 unchanged sentence

Commercial real estate 16,425 70.64 10,551 70.34 11,562 68.18 12,777 63.98 9,415 61.89

Construction 221 5.35 324 6.14 140 4.56 907 6.59 2,105 7.86

Commercial business 3,753 17.02 1,903 14.34 2,902 16.14 3,498 16.85 4,283 15.81

Consumer — — 1 0.01 1 0.02 1 0.04 377 0.11

Total allowance for loan losses $ 21,009 100.00 % $ 13,509 100.00 % $ 15,462 100.00 % $ 18,904 100.00 % $ 17,982 100.00 %

11 unchanged sentences

At December 31,

2020 2019 2018

Value Amortized

(In thousands)

11 unchanged sentences

At December 31, 2020, the carrying value of our investment securities portfolio totaled $106.9 million and represented 5% of total assets, compared to $100.9 million and 5% of total assets at December 31, 2019.

The decrease of $15.7 million primarily

reflects sales, principal payments and calls of state agency and municipal obligations and corporate bonds.

The increase of $6.0 million primarily reflects purchases of corporate bonds and increases in unrealized gains.

We purchase investment grade securities with a focus on liquidity, earnings and duration exposure.

The net unrealized gain position on our investment portfolio at December 31, 2020 was $7.5 million and did not include any gross unrealized losses.

The net unrealized gain position on our investment portfolio at December 31, 2019 was $3.2 million and included gross unrealized losses of $2.0 thousand.

The net unrealized loss position on our investment portfolio at December 31, 2018 was $1.2 million and included gross unrealized losses of $1.9 million .

The gross unrealized losses at December 31, 2018 were concentrated in U.S.

Government and agency obligations.

At December 31, 2019, we determined that there had been no deterioration in credit quality subsequent to purchase and believe that all unrealized losses are temporary.

All of our investment securities are rated investment grade or deemed to be of investment grade quality.

1 unchanged sentence

Information for mortgage-backed securities is based on the final contractual maturity dates without considering repayments and prepayments.

Due Within 1 Year

Due 1–5 Years

Due 5–10 Years

Due After 10 Years or No Contractual Maturity

At December 31, 2019

Due Within 1 Year Due 1–5 Years Due 5–10 Years Due After 10 Years or No Contractual Maturity

At December 31, 2020 Amortized

Cost Yield Amortized

(Dollars in thousands)

2 unchanged sentences

Government and agency obligations 9,976 2.02 — — 8,038 2.88 55,560 2.49

Corporate bonds — — 4,000 4.09 6,000 4.65 1,500 4.50

Total securities available for sale $ 9,976 2.02 % $ 4,000 4.09 % $ 14,038 3.63 % $ 57,060 2.54 %

3 unchanged sentences

Total securities held to maturity $ — — % $ — — % $ — — % $ 16,078 5.01 %

Due Within 1 Year

Due 1–5 Years

Due 5–10 Years

Due After 10 Years or No Contractual Maturity

At December 31, 2018

Due Within 1 Year Due 1–5 Years Due 5–10 Years Due After 10 Years or No Contractual Maturity

At December 31, 2019 Amortized

Cost Yield Amortized

(Dollars in thousands)

2 unchanged sentences

Government and agency obligations 2,100 1.59 9,950 2.02 8,311 2.87 60,902 2.61

State agency and municipal obligations

Corporate bonds

Total securities available for sale $ 2,100 1.59 % $ 9,950 2.02 % $ 8,311 2.87 % $ 60,902 2.61 %

1 unchanged sentence

State agency and municipal obligations $ — — % $ — — % $ — — % $ 16,231 5.05 %

Corporate bonds

Government mortgage-backed securities — — — — — — 77 5.35

13 unchanged sentences

In addition to being an important source of funding for us, deposits also provide an ongoing stream of fee revenue.

We participate in the Certificate of Deposit Account Registry Service, or CDARS, program.

We use CDARS to place customer funds into certificate of deposit accounts issued by other participating banks.

We participate in the Certificate of Deposit Account Registry Service ("CDARS") and Insured Cash Sweep Service ("ICS") programs.

We use CDARS and ICS to place customer funds into certificate of deposit accounts and money market accounts, respectively, into other participating banks.

These transactions occur in amounts that are less than FDIC insurance limits to ensure that deposit customers are eligible for FDIC insurance on the full amount of their deposits.

Reciprocal amounts of deposits are received from other participating banks that do the same with their customer deposits, and, we also execute one-way buy transactions.

CDARS deposits, except for reciprocal deposits, are considered to be brokered deposits for bank regulatory purposes.

CDARS and ICS deposits, except for reciprocal deposits, are considered to be brokered deposits for bank regulatory purposes.

Time deposits may also be generated through the use of a listing service.

4 unchanged sentences

At December 31,

Amount Percent Weighted

Rate Amount Percent Weighted

(Dollars in thousands)

Noninterest-bearing demand $ 270,235 14.79 % — % $ 191,518 12.84 % — %

NOW 101,737 5.57 0.17 70,020 4.69 0.21

Money market 669,364 36.63 0.79 419,495 28.12 1.62

Savings 158,750 8.69 0.81 183,729 12.31 1.67

Time 627,230 34.32 1.77 627,141 42.04 2.27

Total deposits $ 1,827,316 100.00 % 1.23 % $ 1,491,903 100.00 % 1.87 %

Total deposits were $1.5 billion at December 31, 2019, a decrease of $10.3 million , or 1% , from December 31, 2018.

However, deposits grew at an annualized rate of 6% during the final quarter of 2019, which includes strong growth in noninterest bearing deposits.

Brokered certificates of deposits ("Brokered CDs") totaled $179.8 million and $91.8 million at December 31, 2019 and 2018 , respectively.

Total deposits were $1.8 billion at December 31, 2020, an increase of $335.4 million, or 22%, from December 31, 2019, reflecting successful commercial core deposit gathering efforts, as well as a temporary increase in deposits to expand on-balance sheet liquidity during the COVID-19 pandemic.

Brokered certificates of deposits ("Brokered CDs") totaled $238.9 million and $179.8 million at December 31, 2020 and December 31, 2019, respectively.

Certificates of deposits from national listing services totaled $18.4 million at December 31, 2020 and $21.3 million at December 31, 2019.

Brokered money market accounts totaled $13.5 million and $39.9 million at December 31, 2020 and 2019, respectively.

Brokered deposits represent brokered certificates of deposit, brokered money market accounts and one way Certificate of Deposit Account Registry Service (CDARS).

Brokered deposits represent brokered certificates of deposit, brokered money

market accounts, one way buy CDARS, and one way buy Insured Cash Sweep ("ICS").

Brokered deposits are utilized as an additional source of funding.

At December 31, 2019 and 2018, time deposits, including CDARS and brokered deposits, with a denomination of $100 thousand or more totaled $502.8 million and $493.8 million , respectively, maturing during the periods indicated in the table below:

At December 31, 2020 and 2019, time deposits, including CDARS and brokered certificates of deposit, with a denomination of $100 thousand or more totaled $519.8 million and $502.8 million, respectively, maturing during the periods indicated in the table below:

At December 31,

3 unchanged sentences

After 6 months but within 1 year 118,880 104,355

After 1 year 192,051 143,907

Total $ 519,779 $ 502,750

The Bank is a member of the FHLB, which is part of a twelve district Federal Home Loan Bank System.

2 unchanged sentences

The Bank had satisfied its collateral requirement at December 31, 2020.

We utilize advances from the FHLB as part of our overall funding strategy, to meet short-term liquidity needs and to a lesser degree manage interest rate risk arising from the difference in asset and liability maturities.

We utilize advances from the FHLB as part of our overall funding strategy, to meet short-term liquidity needs and to manage interest rate risk arising from the difference in asset and liability maturities.

Total FHLB advances were $175.0 million at December 31, 2020 compared to $150.0 million at December 31, 2019.

The decrease of $10.0 million reflects normal fluctuations in our borrowings.

The increase of $25.0 million reflects normal fluctuations in our borrowings.

Advances from the FHLB include short-term advances with original maturity dates of one year or less.

1 unchanged sentence

Year Ended December 31,

2020 2019 2018

(Dollars in thousands)

As of and for the period ending:

Average amount outstanding during the period $ 165,232 $ 145,921 $ 163,419

2 unchanged sentences

Weighted average interest rate at end of period (1)

Weighted average interest rate during the period

1.84 % 1.93 % 2.55 %

(1) The Company's FHLB borrowings are subject to longer term swap agreements and the weighted average rate reflects the all in swap rate under these long term swap agreements.

On August 19, 2015, the Company completed a private placement of $25.5 million in aggregate principal amount of fixed rate subordinated notes (the “Notes”) to certain institutional investors.

The 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 Notes became callable, in part or in whole, beginning August 2020.

Derivative Instruments

The Company uses interest rate swap instruments to fix the interest rate on short-term FHLB borrowings or Brokered CDs, all of which are designated as cash flow hedges.

The hedge strategy converts the rate of interest on short-term rolling FHLB advances or Brokered CDs to long-term fixed interest rates, thereby protecting the Bank from interest rate variability.

The hedge strategy converts the rate of interest on short-term rolling FHLB advances or Brokered CDs to long-term fixed interest rates, thereby protecting the Bank from interest rate variability in the contractually specified interest rates.

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain loan customers.

2 unchanged sentences

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.

At December 31, 2019, the Company held derivative financial instruments with a total notional amount of $265.0 million .

Information about derivative instruments at December 31, 2020 and 2019 was as follows:

December 31, 2020:

Maturity Date

Original Notional

Amount Original

Maturity Maturity Date Received Paid Fair Value

(Dollars in thousands)

Derivatives designated as hedging instruments:

Interest rate swap

January 1, 2020

3-month LIBOR

Interest rate swap

August 26, 2020

3-month LIBOR

Interest rate swap

3-month LIBOR

Interest rate swap

3-month LIBOR

Interest rate swap

3-month LIBOR

Interest rate swap

January 1, 2034

3-month LIBOR

Interest rate swap

December 23, 2022

3-month LIBOR

Forward-starting interest rate swap (1)

January 1, 2035

3-month LIBOR

Forward-starting interest rate swap (1)

August 26, 2035

3-month LIBOR

Interest rate swap $ 25,000 5.0 years July 1, 2021 3-month LIBOR 1.22% $ (128)

Interest rate swap 25,000 3.0 years December 23, 2022 3-month LIBOR 1.28% (541)

Interest rate swap 25,000 7.0 years August 25, 2024 3-month LIBOR 2.04% (1,622)

Interest rate swap 25,000 7.0 years August 25, 2024 3-month LIBOR 2.04% (1,618)

Interest rate swap 25,000 5.0 years April 9, 2025 3-month LIBOR 0.55% (224)

Interest rate swap 25,000 5.0 years April 23, 2025 3-month LIBOR 0.54% (212)

Interest rate swap 25,000 15.0 years January 1, 2034 3-month LIBOR 3.01% (6,086)

Interest rate swap 25,000 15.0 years January 1, 2035 3-month LIBOR 3.03% (6,445)

Interest rate swap 25,000 15.0 years August 26, 2035 3-month LIBOR 3.05% (6,691)

$ 225,000 $ (23,567)

Derivatives not designated as hedging instruments:

Interest rate swap

March 10, 2039

1-month LIBOR

Interest rate swap

March 10, 2039

1-month LIBOR

Interest rate swap $ 18,500 10.0 years March 10, 2030 1-month LIBOR 3.15% $ (648)

Interest rate swap 18,500 10.0 years March 10, 2030 1-month LIBOR 3.15% 648

Interest rate swap 20,000 20.0 years March 10, 2039 1-month LIBOR 5.00% (3,796)

Interest rate swap 20,000 20.0 years March 10, 2039 1-month LIBOR 5.00% 3,796

Total Derivatives $ 302,000 $ (23,567)

(1) The effective date of the forward-starting interest rate swaps listed above are January 2, 2020 and August 26, 2020, respectively.

(2) Represents an interest rate swap with a commercial banking customer, which is offset by a derivative with a third party.

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

December 31, 2019:

Maturity Date

Original Notional

Amount Original

Maturity Maturity Date Received Paid Fair Value

(Dollars in thousands)

Derivatives designated as hedging instruments:

Interest rate swap

January 1, 2019

3-month LIBOR

Interest rate swap

January 1, 2020

3-month LIBOR

Interest rate swap

August 26, 2020

3-month LIBOR

Interest rate swap

3-month LIBOR

Interest rate swap

August 25, 2024

3-month LIBOR

Interest rate swap

August 25, 2024

3-month LIBOR

Forward-starting interest rate swap (1)

January 1, 2034

3-month LIBOR

Interest rate swap $ 25,000 5.0 years January 1, 2020 3-month LIBOR 1.83% $ —

Interest rate swap 25,000 5.0 years August 26, 2020 3-month LIBOR 1.48% 51

Interest rate swap 25,000 5.0 years July 1, 2021 3-month LIBOR 1.22% 174

Interest rate swap 25,000 7.0 years August 25, 2024 3-month LIBOR 2.04% (396)

Interest rate swap 25,000 7.0 years August 25, 2024 3-month LIBOR 2.04% (402)

Interest rate swap 25,000 15.0 years January 1, 2034 3-month LIBOR 3.01% (3,328)

Interest rate swap 25,000 3.0 years December 23, 2022 3-month LIBOR 1.28% 279

Forward-starting interest rate swap (1)

January 1, 2035

3-month LIBOR

25,000 15.0 years January 1, 2035 3-month LIBOR 3.03% (3,557)

Forward-starting interest rate swap (1)

August 26, 2035

3-month LIBOR

(1) The effective date of the forward-starting interest rate swaps listed above are January 2, 2019, January 2, 2020 and August 26, 2020, respectively.

25,000 15.0 years August 26, 2035 3-month LIBOR 3.05% (3,512)

$ 225,000 $ (10,691)

Derivatives not designated as hedging instruments:

Interest rate swap $ 20,000 20.0 years March 20, 2039 1-month USD LIBOR 5.00% $ (1,762)

Interest rate swap 20,000 20.0 years March 20, 2039 1-month USD LIBOR 5.00% 1,762

Total Derivatives $ 265,000 $ (10,691)

(1) The effective date of the forward-starting interest rate swaps listed above are January 2, 2020 and August 26, 2020, respectively.

(2) Represents an interest rate swap with a commercial banking customer, which is offset by a derivative with a third party.

Liquidity and Capital Resources

10 unchanged sentences

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.

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.

Capital Resources

Shareholders’ equity totaled $182.4 million as of December 31, 2019, an increase of $8.2 million compared to December 31, 2018, primarily a result of net income for the year ended December 31, 2019 of $18.2 million.

The increase was partially offset by a $6.5 million unfavorable impact to accumulated other comprehensive income driven by fair value marks related to hedge positions involving interest rate swaps, as well as dividends paid of $4.1 million and common stock repurchases of $1.0 million.

The decrease was partially offset by net income for the year ended December 31, 2020 of $5.9 million.

The marks on the interest rate swaps are driven by lower long term market interest rates in 2020 when compared to 2019.

Company's interest rate swaps are primarily used to hedge interest rate risk in relation to our funding sources.

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 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.

As of December 31, 2020, the tangible common equity ratio and tangible book value per share were 7.73% and $22.43, respectively.

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At December 31, 2020, the Bank’s ratio of total common equity tier 1 capital to risk-weighted assets was 11.06%, total capital to risk-weighted assets was 12.28%, Tier 1 capital to risk-weighted assets was 11.06% and Tier 1 capital to average assets was 8.44%.

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.

As of January 1, 2019, the "capital conservation buffer" increased from 1.875% to 2.5%.

As of January 1, 2015, the Parent Corporation 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 to 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 will 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.

The “capital conservation buffer” was phased in from January 1, 2016 to January 1, 2019, when the full capital conservation buffer became effective.

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.

Contractual Obligations

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Payments Due by Period

Total Less Than

(in thousands)

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Amount of Commitment Expiration per Period

Total Less Than

(in thousands)

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Amount of Commitment Expiration per Period

Total Less Than

(in thousands)

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

What changed 10-K

Item 7. Management’s Discussion and Analysis