What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-07 compared with 2020-11-04 · 109 added, 221 removed, 314 unchanged (51% of the section changed)

4 unchanged sentences

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, 2019 in the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.” Additionally, the COVID-19 pandemic could adversely affect the Company, its customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on its business, financial position, results of operations, liquidity, and prospects is uncertain.

We assume no obligation to update any of these forward-looking statements.

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.

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 in the New York metropolitan area and throughout Connecticut with the majority of our loans in Fairfield and New Haven Counties, Connecticut.

Through our wholly owned subsidiary, Bankwell Bank, or the Bank, we serve small and medium-sized businesses and retail customers in Connecticut, with the majority of the Company's loans in Fairfield and New Haven Counties and some New York metro area counties.

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.

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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 outbreak 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 nine months ended September 30, 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 COVID-19 pandemic has resulted in significant economic disruption affecting our business and the clients we serve.

As vaccination efforts have rapidly expanded, restrictions on businesses are being lifted and a return to more normal economic activity is expected.

However, a significant degree of uncertainty still exists concerning the ultimate duration and magnitude of the COVID-19 pandemic.

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.

Critical Accounting Policies and Estimates

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Earnings and Performance Overview

For the three months ended September 30, 2020, we had net interest income of $13.6 million, an increase of $0.6 million or 4.6% when compared to the same period in 2019.

The increase in net interest income was due to a decline in interest expense, driven by lower interest rates when compared to the same period in 2019.

For the nine months ended September 30, 2020, we had net interest income of $40.5 million, a decrease of $0.3 million, or 0.9%, over the nine months ended September 30, 2019.

The decrease in net interest income for the nine months ended September 30, 2020 was attributable to a decline in income from loan prepayments and lower loan yields as loans are re-priced in the current low interest rate environment.

The decrease in net interest income was partially offset by a decline in interest expense, driven by lower interest rates when compared to the same period in 2019.

Noninterest income decreased $0.9 million to $0.6 million for the three months ended September 30, 2020 compared to the same period in 2019.

Noninterest income decreased $1.9 million to $2.3 million for the nine months ended September 30, 2020 compared to the same period in 2019.

The decrease in noninterest income for the three and nine months ended September 30, 2020, when compared to the same periods in 2019, was primarily a result of the absence of gains and fees from the sales of SBA loans, and to a lesser degree, a decrease in service charges and fees.

Net income available to common shareholders was $3.0 million, or $0.38 per diluted share, and $4.1 million, or $0.52 per diluted share, for the three months ended September 30, 2020 and 2019, respectively.

Net income available to common shareholders was $5.6 million, or $0.71 per diluted share, and $14.7 million, or $1.87 per diluted share, for the nine months ended September 30, 2020 and 2019, respectively.

The decrease in net income for the three month period ended September 30, 2020 when compared to the same period in 2019 was driven by an increase in noninterest expense.

The decrease in net income for the nine months ended September 30, 2020 when compared to the same period in 2019 was due to an increase in the provision for loan losses due to the COVID-19 pandemic and, to a lesser degree, an increase in noninterest expense.

The provision for loan losses related to COVID-19 totaled $7.9 million for the nine months ended September 30, 2020.

Returns on average stockholders' equity and average assets for the three months ended September 30, 2020 were 6.87% and 0.55%, respectively, compared to 9.12% and 0.87%, respectively, for the three months ended September 30, 2019.

Returns on average stockholders' equity and average assets for the nine months ended September 30, 2020 were 4.23% and 0.36%, respectively, compared to 11.06% and 1.05%, respectively, for the nine months ended September 30, 2019.

For the nine months ended September 30, 2020, returns were negatively impacted due to the increase in the provision for loan losses.

The return on average assets was negatively impacted by higher average asset balances, primarily due to additional liquidity maintained on the balance sheet.

For the three months ended March 31, 2021, we had net interest income of $14.7 million, an increase of $1.4 million or 10.3% when compared to the same period in 2020.

The increase in net interest income was primarily due to a decline in interest expense from lower interest rates when compared to the same period in 2020.

Noninterest income increased $0.9 million to $2.0 million for the three months ended March 31, 2021 compared to the same period in 2020.

The increase in noninterest income for the three months ended March 31, 2021, when compared to the same periods in 2020, was primarily a result of resumed SBA loan sales, totaling $0.5 million for the quarter ended March 31, 2021.

In addition, the increase 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 in the quarter ended March 31, 2020.

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 March 31, 2021, the Company has paid a total of $0.3 million in employee severance costs and a total of $21 thousand in vendor contract termination costs.

Reference the 2020 Form 10-K for further discussion on these charges.

Net income available to common shareholders was $5.7 million, or $0.71 per diluted share, and $1.4 million, or $0.17 per diluted share, for the three months ended March 31, 2021 and 2020, respectively.

The increase in net income was impacted by the aforementioned increases in net interest income and noninterest income.

Returns on average stockholders' equity and average assets for the three months ended March 31, 2021 were 12.67% and 1.02%, respectively, compared to 3.03% and 0.29%, respectively, for the three months ended March 31, 2020.

Results of Operations

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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, 2020 and 2019 was $13.7 million and $13.1 million, respectively.

FTE interest income for the three months ended September 30, 2020 decreased by $1.6 million, or 7.7%, to $19.0 million, compared to FTE interest income for the three months ended September 30, 2019.

The decrease in net interest income was primarily a result of lower loan yields as loans are re-priced in the current low interest rate environment.

The decrease in net interest income was partially offset by a decrease in interest expense driven by lower interest rates on deposits.

FTE net interest income for the nine months ended September 30, 2020 and 2019 was $40.7 million and $41.1 million, respectively.

FTE interest income for the nine months ended September 30, 2020 decreased by $4.7 million, or 7.5%, to 58.5 million, compared to FTE interest income for the nine months ended September 30, 2019 The decrease in net interest income was primarily a result of a decline in income from loan prepayments and lower loan yields as loans are re-priced in the current low interest rate environment.

The decrease in net interest income was partially offset by a decrease in interest expense driven by lower interest rates on deposits.

The net interest margin decreased by 29 basis points to 2.67% for the three months ended September 30, 2020, compared to the three months ended September 30, 2019 and the net interest margin decreased by 26 basis points to 2.81% for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019.

The decline in the net interest margin was primarily due to excess cash held at low interest rates to maintain a higher level of liquidity during the COVID-19 pandemic.

Interest expense for the three months ended September 30, 2020 decreased by $2.2 million, or 29.0%, compared to interest expense for the three months ended September 30, 2019.

Interest expense for the nine months ended September 30, 2020 decreased by $4.3 million, or 19.5%, compared to interest expense for the nine months ended September 30, 2019.

This decrease is due to lower interest rates on deposits for the three and nine months ended September 30, 2020 when compared to the same periods in 2019.

FTE net interest income for the three months ended March 31, 2021 and 2020 was $14.7 million and $13.3 million, respectively.

FTE interest income for the three months ended March 31, 2021 decreased by $1.3 million, or 6.6%, to $18.8 million, compared to FTE interest income for the three months ended March 31, 2020.

This decrease was due to lower loan yields as loans re-priced at lower interest rates throughout 2020.

Interest expense for the three months ended March 31, 2021 decreased by $2.7 million, or 39.5%, compared to interest expense for the three months ended March 31, 2020.

This decrease is due to lower interest rates on deposits.

The net interest margin decreased by 24 basis points to 2.74% for the three months ended March 31, 2021, compared to the three months ended March 31, 2020.

The decrease in net interest margin was primarily due to excess liquidity.

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, 2020 and 2019.

Three Months Ended September 30,

(Dollars in thousands) Average Balance Interest Yield / Rate (5)

Average Balance Interest Yield / Rate (5)

Cash and Fed funds sold $ 312,078 $ 96 0.12 % $ 86,967 $ 535 2.44 %

Securities (1)

96,448 776 3.22 109,247 845 3.09

Commercial real estate 1,087,765 12,570 4.52 1,066,256 12,590 4.62

Residential real estate 125,069 1,097 3.51 161,312 1,559 3.87

Construction (2)

94,984 1,029 4.24 86,342 1,141 5.17

Commercial business 322,066 3,329 4.04 248,116 3,761 5.93

Consumer 121 2 7.37 229 4 6.93

Total loans 1,630,005 18,027 4.33 1,562,255 19,055 4.77

Federal Home Loan Bank stock 7,835 77 3.91 7,474 113 6.02

Total earning assets 2,046,366 $ 18,976 3.63 % 1,765,943 $ 20,548 4.55 %

Other assets 132,617 103,742

Total assets $ 2,178,983 $ 1,869,685

Liabilities and shareholders' equity:

Interest bearing liabilities:

NOW $ 87,890 $ 40 0.18 % $ 62,444 $ 26 0.17 %

Money market 517,638 859 0.66 423,638 1,739 1.63

Savings 163,135 237 0.58 174,587 740 1.68

Time 757,176 2,968 1.56 644,536 3,826 2.36

Total interest bearing deposits 1,525,839 4,104 1.07 1,305,205 6,331 1.92

Borrowed money 200,237 1,210 2.36 175,185 1,151 2.57

Total interest bearing liabilities 1,726,076 $ 5,314 1.22 % 1,480,390 $ 7,482 2.01 %

Noninterest bearing deposits 226,473 177,922

Other liabilities 53,272 33,457

Total Liabilities 2,005,821 1,691,769

Shareholders' equity 173,162 177,916

Total liabilities and shareholders' equity $ 2,178,983 $ 1,869,685

Net interest income (3)

$ 13,662 $ 13,066

Interest rate spread 2.41 % 2.54 %

Net interest margin (4)

2.67 % 2.96 %

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

(2) Includes commercial and residential real estate construction.

(3) The adjustment for securities and loans taxable equivalency amounted to $54 thousand and $55 thousand for the three months ended September 30, 2020 and 2019, respectively.

(4) Annualized net interest income as a percentage of earning assets.

(5) Yields are calculated using the contractual day count convention for each respective product type.

Nine Months Ended September 30,

The following table presents 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 months ended March 31, 2021 and 2020.

Three Months Ended March 31,

(Dollars in thousands) Average Balance Interest Yield / Rate (5)

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(2) Includes commercial and residential real estate construction.

(3) The adjustment for securities and loans taxable equivalency amounted to $159 thousand and $195 thousand for the nine months ended September 30, 2020 and 2019, respectively.

(3) The adjustment for securities and loans taxable equivalency amounted to $50 thousand and $53 thousand for the three months ended March 31, 2021 and 2020, respectively.

(4) Annualized net interest income as a percentage of earning assets.

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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, 2020 vs 2019

Increase (Decrease) Nine Months Ended September 30, 2020 vs 2019

Three Months Ended March 31, 2021 vs 2020

Increase (Decrease)

(In thousands) Volume Rate Total Volume Rate Total

(In thousands) Volume Rate Total

Interest and dividend income:

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Interest expense:

NOW 12 2 14 22 (24) (2)

Money market 687 (1,229) (542)

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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, 2020 was $0.7 million compared to a provision for loan losses of $0.8 million for the three months ended September 30, 2019.

The provision for loan losses for the nine months ended September 30, 2020 was $6.9 million compared to a provision for loan losses of $0.1 million for the nine months ended September 30, 2019.

The increase in the provision for loan losses for the nine months ended September 30, 2020, was due to management’s assessment of increased credit risk relating to economic disruption and uncertainty caused by the COVID-19 pandemic.

For further information, see sections titled Asset Quality and Allowance for Loan Losses.

The credit for loan losses for the three months ended March 31, 2021 was $0.3 million compared to a provision for loan losses of $3.2 million for the three months ended March 31, 2020.

The decrease in the provision for loan losses for the three months ended March 31, 2021 was primarily due to improving economic trends, partially offset by increased reserves on impaired loans and overall higher loan balances.

Noninterest Income

Noninterest income is a component of our revenue and is comprised primarily of fees generated from loan and 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, 2020 and 2019:

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 table compares noninterest income for the three months ended March 31, 2021 and 2020:

Three Months Ended

September 30, Change

(Dollars in thousands) 2020 2019 $ %

Bank-owned life insurance $ 242 $ 255 $ (13) (5.1) %

Service charges and fees 190 264 (74) (28.0)

Gains and fees from sales of loans 27 703 (676) (96.2)

Gain (loss) on sale of other real estate owned, net 19 (102) 121 (118.6)

Other 136 432 (296) (68.5)

Total noninterest income $ 614 $ 1,552 $ (938) (60.4) %

Nine Months Ended

September 30, Change

March 31, Change

(Dollars in thousands) 2021 2020 $ %

Gains and fees from sales of loans $ 513 $ — $ 513 N/A

Bank-owned life insurance 231 243 (12) (4.9)

Service charges and fees 199 217 (18) (8.3)

Gains and fees from sales of loans 27 1,409 (1,382) (98.1)

Gain (loss) on sale of other real estate owned, net 19 (102) 121 (118.6)

Net gain on sale of available for sale securities — 76 (76) (100.0)

Other 1,013 612 401 65.5

Total noninterest income $ 1,956 $ 1,072 $ 884 82.5 %

Noninterest income decreased by $0.9 million, or 60%, to $0.6 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

Noninterest income decreased by $1.9 million, or 46%, to $2.3 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

The decrease in noninterest income was primarily a result of the absence of gains and fees from the sales of SBA loans for the three and nine months ended September 30, 2020 compared to the same periods in 2019.

To a lesser degree, 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 was primarily a result of loan related interest rate swap fees recognized in 2019.

Noninterest income increased by $0.9 million, or 82.5%, to $2.0 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

The increase in noninterest income was driven by resumed SBA loan sales, totaling $0.5 million for the quarter ended March 31, 2021.

Noninterest Expense

The following tables compare noninterest expense for the three and nine months ended September 30, 2020 and 2019:

The following table compares noninterest expense for the three months ended March 31, 2021 and 2020:

Three Months Ended

September 30, Change

March 31, Change

(Dollars in thousands) 2021 2020 $ %

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Occupancy and equipment 2,406 1,909 497 26.0

Data processing 529 505 24 4.8

Professional services 587 711 (124) (17.4)

Director fees 301 235 66 28.1

FDIC insurance 176 (125) 301 (240.8)

Marketing 151 210 (59) (28.1)

Amortization of intangibles 18 19 (1) (5.3)

Other 619 655 (36) (5.5)

Total noninterest expense $ 9,729 $ 8,672 $ 1,057 12.2 %

Nine Months Ended

September 30, Change

(Dollars in thousands) 2020 2019 $ %

Salaries and employee benefits $ 15,902 $ 14,272 $ 1,630 11.4 %

Occupancy and equipment 6,410 5,666 744 13.1

Data processing 512 536 (24) (4.5)

Professional services 1,519 1,455 64 4.4

Director fees 883 639 244 38.2

FDIC insurance 403 70 333 475.7

Director fees 317 295 22 7.5

Marketing (9) 162 (171) (105.6)

Amortization of intangibles 54 57 (3) (5.3)

Other 653 596 57 9.6

Total noninterest expense $ 9,638 $ 9,659 $ (21) (0.2) %

Noninterest expense increased by $1.1 million, or 12.2%, to $9.7 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

Noninterest expense increased by $2.7 million or 10.3%, to $29.1 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

The increase in noninterest expense was primarily driven by an increase in salaries and employee benefits, occupancy and equipment expense and FDIC insurance expense.

Salaries and employee benefits totaled $5.3 million for the three months ended September 30, 2020, an increase of $0.4 million when compared to the same period in 2019.

Salaries and employee benefits totaled $15.9 million for the nine months ended September 30, 2020, an increase of $1.6 million when compared to the same period in 2019.

The increase in salaries and employee benefits was primarily driven by normal annual salary increases, additional hires in support of growth initiatives and expanded employee benefits to assist employees impacted by the COVID-19 pandemic.

Occupancy and equipment expense totaled $2.3 million for the three months ended September 30, 2020, an increase of $0.3 million when compared to the same period in 2019.

Occupancy and equipment expense totaled $6.4 million for the nine months ended September 30, 2020, an increase of $0.7 million when compared to the same period in 2019.

Noninterest expense decreased by $21.0 thousand, or 0.2%, to $9.6 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

The decrease in noninterest expense was primarily driven by a decline in salaries and employee benefits and marketing expense, partially offset by an increase in occupancy and equipment expense and FDIC insurance expense.

Salaries and employee benefits totaled $4.8 million for the quarter ended March 31, 2021, a decrease of $0.6 million when compared to the same period in 2020.

The decrease in salaries and employee benefits 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 123 at March 31, 2021 compared to 154 for the same period in 2020.

Salaries and employee benefits were also favorably impacted as higher loan originations enabled the bank to defer a greater amount of expenses.

Occupancy and equipment expense totaled $2.4 million for the quarter ended March 31, 2021, an increase of $0.5 million when compared to the same period in 2020.

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

FDIC insurance expense totaled $0.2 million for the three months ended September 30, 2020, an increase of $0.3 million when compared to the same period in 2019.

FDIC insurance expense totaled $0.5 million for the nine months ended September 30,

2020, an increase of $0.5 million when compared to the same period in 2019.

The increase in FDIC insurance expense was primarily driven by a credit received during the three months ended September 30, 2019, that was not repeated during the three months ended September 30, 2020.

Income tax expense for the three months ended September 30, 2020 and 2019 totaled $0.8 million and $1.0 million, respectively.

The effective tax rates for the three months ended September 30, 2020 and 2019 were 20.9% and 20.1%, respectively.

Income tax expense for the nine months ended September 30, 2020 and 2019 totaled $1.2 million and $3.8 million, respectively.

The effective tax rates for the nine months ended September 30, 2020 and 2019 were 18.0% and 20.5%, respectively.

For the nine months ended September 30, 2020, the decline in the effective tax rate was primarily attributable to 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.

FDIC insurance expense totaled $0.4 million for the quarter ended March 31, 2021, an increase of $0.3 million when compared to the same period in 2020.

The increase in FDIC insurance expense was due to the application of available FDIC insurance credits in the first quarter of 2020.

Income tax expense for the three months ended March 31, 2021 and 2020 totaled $1.6 million and $0.2 million, respectively.

The effective tax rates for the three months ended March 31, 2021 and 2020 were 21.7% and 10.0%, respectively.

For the three months ended March 31, 2021, the increase in the effective tax rate was primarily attributable to a discrete benefit recognized in the first quarter of 2020.The impact of these items on the effective tax rate varies with changes in pre-tax income.

Financial Condition

At September 30, 2020 total assets were $2.2 billion, a $310.8 million, or a 16.5%, increase compared to December 31, 2019.

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

Gross loans totaled $1.6 billion at September 30, 2020, an increase of $20.2 million compared to December 31, 2019.

Excluding PPP loans, gross loans decreased by $36.5 million at September 30, 2020 when compared to December 31, 2019.

Deposits totaled $1.8 billion at September 30, 2020, compared to $1.5 billion at December 31, 2019.

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

Total shareholders’ equity at September 30, 2020 and December 31, 2019 was $174.3 million and $182.4 million, respectively.

The decrease in shareholders' equity was primarily driven by a $10.7 million unfavorable impact to accumulated other comprehensive loss, driven by fair value marks related to hedge positions involving interest rate swaps, as well as $3.3 million in dividends paid and common stock repurchases of $1.0 million.

The decrease was partially offset by net income for the nine months ended September 30, 2020 of $5.6 million.

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

At March 31, 2021 total assets were $2.2 billion, a $9.3 million, or a 0.4% decrease compared to December 31, 2020.

The decrease in assets is primarily due to a decrease in excess liquidity, partially offset by an increase in loans.

Gross loans totaled $1.7 billion at March 31, 2021, an increase of $47.6 million compared to December 31, 2020.

Excluding PPP loans, gross loans increased by $63.2 million at March 31, 2021 when compared to December 31, 2020.

Deposits totaled $1.9 billion at March 31, 2021, compared to $1.8 billion at December 31, 2020.

Total shareholders’ equity at March 31, 2021 and December 31, 2020 was $187.9 million and $176.6 million, respectively.

The increase in shareholders' equity was primarily driven by (i) a $7.7 million favorable impact to accumulated other comprehensive income driven by fair value marks related to hedge positions involving interest rate swaps and (ii) net income for the quarter ended March 31, 2021 of $5.7 million.

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.

Tangible book value was $22.20 per share outstanding at September 30, 2020 compared to $23.15 per share outstanding at December 31, 2019.

The increase in Shareholders’ equity was partially offset by dividends paid of $1.1 million and common stock repurchases of $1.4 million.

Loan Portfolio

We originate commercial real estate loans, including construction loans, commercial business loans and other consumer loans.

Lending activities are conducted principally in the New York metropolitan area and throughout Connecticut, with the majority in Fairfield and New Haven Counties of Connecticut.

Our loan portfolio is the largest category of our earning assets.

Total loans before deferred loan fees and the allowance for loan losses were $1.62 billion at September 30, 2020 and $1.60 billion at December 31, 2019.

Total gross loans increased $20.2 million as of September 30, 2020 compared to the year ended December 31, 2019.

Total loans before deferred loan fees and the allowance for loan losses were $1.67 billion at March 31, 2021 and $1.63 billion at December 31, 2020.

Total gross loans increased $47.6 million as of March 31, 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, 2020 At December 31, 2019 Change

(In thousands) At March 31, 2021 At December 31, 2020 Change

Real estate loans:

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The following table presents nonperforming assets and additional asset quality data for the dates indicated:

(In thousands) At September 30, 2020 At December 31, 2019

(In thousands) At March 31, 2021 At December 31, 2020

Nonaccrual loans:

3 unchanged sentences

Commercial business 1,803 1,834

Construction 8,997 8,997

Total nonaccrual loans 31,366 33,416

4 unchanged sentences

Total past due loans to total gross loans 2.39 % 0.93 %

Nonperforming assets totaled $10.2 million and represented 0.46% of total assets at September 30, 2020, compared to $10.6 million and 0.56% of total assets at December 31, 2019.

Nonaccrual loans totaled $10.2 million at September 30, 2020, of which $4.5 million is guaranteed by the Small Business Administration (SBA).

There was no other real estate owned at September 30, 2020 or December 31, 2019.

Nonperforming assets totaled $31.4 million and represented 1.40% of total assets at March 31, 2021, compared to $33.4 million and 1.48% of total assets at December 31, 2020.

Nonaccrual loans totaled $31.4 million at March 31, 2021.

There was no other real estate owned at March 31, 2021 or December 31, 2020.

Allowance for Loan Losses

8 unchanged sentences

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,

Three Months Ended March 31,

(Dollars in thousands) 2021 2020

Balance at beginning of period $ 21,009 $ 13,509

Residential real estate — (78) — (875)

Commercial real estate (163) —

3 unchanged sentences

Commercial business — 1

Consumer 2 24 2 28

Total recoveries 9 2

Net charge-offs (168) (8)

Provision charged to earnings 712 773 6,896 127

(Credit) provision charged to earnings (296) 3,185

Balance at end of period $ 20,545 $ 16,686

1 unchanged sentence

Allowance for loan losses to total gross loans 1.23 % 1.03 %

At September 30, 2020, our allowance for loan losses was $20.4 million and represented 1.25% of total gross loans, compared to $13.5 million, or 0.84% of total gross loans, at December 31, 2019.

The $6.9 million increase in the allowance for loan losses at September 30, 2020 when compared to December 31, 2019 was primarily due to incremental loan loss reserves recognized for increased credit risk relating to economic disruption and uncertainty caused by the COVID-19 pandemic.

At March 31, 2021, our allowance for loan losses was $20.5 million and represented 1.23% 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, 2020 At December 31, 2019

At March 31, 2021 At December 31, 2020

(Dollars in thousands) Amount Percent of Loan Portfolio Amount Percent of Loan Portfolio

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Total allowance for loan losses $ 20,545 100.00 % $ 21,009 100.00 %

The allocation of the allowance for loan losses at September 30, 2020 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, 2020 is appropriate to cover probable losses.

Section 4013 of the CARES Act allows financial institutions to grant short term payment relief to borrowers impacted by COVID-19 and permits a financial institution to elect to suspend troubled debt restructuring accounting for relief granted under the Act.

As of September 30, 2020, the Company has active COVID-19 related deferrals on 12 loans (excluding SBA loans, which are paid for 6 months by the SBA on behalf of borrowers) totaling $32.7 million.

In addition, the Company was evaluating 10 loans, totaling $31.3 million, for a second COVID-19 deferral term.

The Company has thoroughly evaluated these deferral requests, granting initial three month payment deferral periods and, in some instances, a second three month 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.

Also, the FASB has determined that the TDR guidance in the interagency statement is an appropriate

application of ASC 310-40.

As such, all of the Company’s deferrals under the CARES Act are also considered in conformity with US GAAP as to their non-TDR classification.

The following table details these deferral by loan category and type as of September 30, 2020:

At September 30, 2020

(Dollars in thousands) Amount Number

Commercial real estate $ 23,207 8

Construction 8,997 2

Commercial business 481 2

Total $ 32,685 12

The allocation of the allowance for loan losses at March 31, 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 March 31, 2021 is appropriate to cover probable losses.

Reserve for Unfunded Commitments

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Investment Securities

At September 30, 2020, the carrying value of our investment securities portfolio totaled $108.9 million and represented 5.0% of total assets, compared to $100.9 million, or 5.4% of total assets, at December 31, 2019.

The net unrealized gain position on our investment portfolio at September 30, 2020 was $7.5 million and included no 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.

At March 31, 2021, the carrying value of our investment securities portfolio totaled $101.6 million and represented 4.5% 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 March 31, 2021 was $4.8 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

Nine Months Ended September 30, 2020 Twelve Months Ended December 31, 2019

At March 31, 2021 At December 31, 2020

(Dollars in thousands) Amount Percent Weighted Average Rate Amount Percent Weighted Average Rate

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Total deposits $ 1,859,808 100.00 % 0.78 % $ 1,827,316 100.00 % 1.23 %

Total deposits were $1.8 billion at September 30, 2020, an increase of $275.6 million, from the balance at December 31, 2019.

The increase in total deposits was a result of successful commercial core deposit gathering efforts, as well as a temporary increase in short term time deposits to expand on-balance sheet liquidity during the COVID-19 pandemic.

Brokered certificates of deposits totaled $296.0 million and $179.8 million at September 30, 2020 and December 31, 2019, respectively.

Brokered money market accounts totaled $28.7 million and $39.9 million at September 30, 2020 and December 31, 2019, respectively.

Total deposits were $1.9 billion at March 31, 2021, an increase of $32.5 million, from the balance at December 31, 2020.

Brokered certificates of deposits totaled $200.1 million at March 31, 2021 and $238.9 million at December 31, 2020.

Certificates of deposits from national listing services totaled $4.9 million at March 31, 2021 and $18.4 million at December 31, 2020.

Brokered money market accounts totaled $53.8 million at March 31, 2021 and $13.5 million at December 31, 2020.

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

Brokered deposits are utilized as an additional source of funding.

At September 30, 2020 and December 31, 2019, time deposits with a denomination of $100 thousand or more, including CDARS and brokered deposits, totaled $601.6 million and $502.8 million, respectively, maturing during the periods indicated in the table below:

(Dollars in thousands) September 30, 2020 December 31, 2019

At March 31, 2021 and December 31, 2020, time deposits with a denomination of $100 thousand or more, including CDARS and brokered deposits, totaled $444.1 million and $519.8 million, respectively, maturing during the periods indicated in the table below:

(Dollars in thousands) March 31, 2021 December 31, 2020

Within 3 months $ 118,547 $ 141,784

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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 $175.0 million and $150.0 million at September 30, 2020 and December 31, 2019, respectively.

The increase of $25.0 million, or 16.7%, reflects normal operating fluctuation in our borrowings.

Total FHLB advances were $125.0 million and $175.0 million at March 31, 2021 and December 31, 2020, respectively.

The decrease of $50.0 million, or 28.6%, reflects the substitution of lower cost brokered deposits in lieu of FHLB advances.

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, 2020, the Bank had pledged $858.7 million of eligible loans as collateral to support borrowing capacity at the FHLB of Boston.

As of September 30, 2020, the Bank had immediate availability to borrow an additional $355.8 million based on qualified collateral.

At March 31, 2021, the Bank had pledged $814.3 million of eligible loans as collateral to support borrowing capacity at the FHLB of Boston.

As of March 31, 2021, the Bank had immediate availability to borrow an additional $384.7 million based on qualified collateral.

Liquidity and Capital Resources

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The Company anticipates that it will have sufficient funds available to meet its current loan and other commitments.

As of September 30, 2020, the Company had cash and cash equivalents of $339.5 million and available-for-sale securities of $90.6 million.

At September 30, 2020, outstanding commitments to originate loans totaled $23.3 million and undisbursed funds from approved lines of credit, home equity lines of credit and secured commercial lines of credit totaled $153.2 million.

As of March 31, 2021, the Company had cash and cash equivalents of $362.0 million and available-for-sale securities of $83.2 million.

At March 31, 2021, outstanding commitments to originate loans totaled $82.2 million and undisbursed funds from approved lines of credit, home equity lines of credit and secured commercial lines of credit totaled $200.3 million.

Capital Resources

Shareholders’ equity totaled $174.3 million as of September 30, 2020, a decrease of $8.1 million compared to December 31, 2019, primarily a result of an $10.7 million unfavorable impact to accumulated other comprehensive loss driven by fair value marks related to hedge positions involving interest rate swaps, as well as $3.3 million in dividends paid and common stock

repurchases of $1.0 million.

The decrease was partially offset by net income for the nine months ended September 30, 2020 of $5.6 million.

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

Shareholders’ equity totaled $187.9 million as of March 31, 2021, an increase of $11.3 million compared to December 31, 2020, primarily a result of (i) a $7.7 million favorable impact to accumulated other comprehensive income driven by fair value

marks related to hedge positions involving interest rate swaps and (ii) net income for the quarter ended March 31, 2021 of $5.7 million.

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 September 30, 2020, the tangible common equity ratio and tangible book value per share were 7.83% and $22.20, respectively.

The increase in Shareholders’ equity was partially offset by dividends paid of $1.1 million and common stock repurchases of $1.4 million.

As of March 31, 2021, the tangible common equity ratio and tangible book value per share were 8.27% and $23.99, 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, 2020, 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, 2020, the Bank’s ratio of Common Equity Tier 1 capital to risk-weighted assets was 12.36%, total capital to risk-weighted assets was 13.57%, Tier 1 capital to risk-weighted assets was 12.36% and Tier 1 capital to average assets was 9.58%.

At March 31, 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 March 31, 2021, the Bank’s ratio of Common Equity Tier 1 capital to risk-weighted assets was 11.02%, total capital to risk-weighted assets was 12.17%, Tier 1 capital to risk-weighted assets was 11.02% and Tier 1 capital to average assets was 8.82%.

In July 2013, the Federal Reserve published Basel III rules establishing a new comprehensive capital framework of U.S.

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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 September 30, 2020, the capital conservation buffer was 5.6% and 5.3% at the Bank and the Company, respectively.

Asset/Liability Management and Interest Rate Risk

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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, 2020, 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, 2020 and December 31, 2019:

As of March 31, 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 March 31, 2021 and December 31, 2020:

Parallel Ramp Estimated Percent Change in Net Interest Income

Rate Changes (basis points) September 30, 2020 December 31, 2019

Rate Changes (basis points) March 31, 2021 December 31, 2020

-100 (0.60) % 0.20 %

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Parallel Shock Estimated Percent Change in Net Interest Income

Rate Changes (basis points) September 30, 2020 December 31, 2019

Rate Changes (basis points) March 31, 2021 December 31, 2020

-100 (1.30) % (0.30) %

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+300 (1.40) (2.00)

The net interest income at risk simulation results indicate that, as of September 30, 2020, we remain liability sensitive.

The net interest income at risk simulation results indicate that, as of March 31, 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.

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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

Rate Changes (basis points) September 30, 2020 December 31, 2019

Estimated Percent Change in Economic Value of Equity ("EVE")

Rate Changes (basis points) March 31, 2021 December 31, 2020

-100 (26.80) % (47.30) %

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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 (26.8)% is outside of policy parameters.

However, because the Bank continues to be well-capitalized, the downward rate scenarios are extremely unlikely in

the current economic and interest rate environment.

The result of this simulation was discussed with the ALCO committee and the Company has decided to not take any further action at this time.

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.

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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-Q

Item 2. Management’s Discussion and Analysis