Bankwell Financial Group, Inc. 10-Q

Item 1. Financial Statements Bankwell Financial Group, Inc. Consolidated Balance Sheets - (unaudited) (In thousands, except share data) September 30, 2021 December 31, 2020 ASSETS Cash and due from banks $ 169,417 $ 405,340 Federal funds sold 8,097 4,258 Cash and cash equivalents 177,514 409,598 Investment securities Marketable equity securities, at fair value 2,185 2,207 Available for sale investment securities, at fair value 87,565 88,605 Held to maturity investment securities, at amortized cost (fair values of $ 18,360 and $ 20,032 at September 30, 2021 and December 31, 2020, respectively) 16,107 16,078 Total investment securities 105,857 106,890 Loans receivable (net of allowance for loan losses of $ 16,803 at September 30, 2021 and $ 21,009 at December 31, 2020) 1,805,217 1,601,672 Accrued interest receivable 6,911 6,579 Federal Home Loan Bank stock, at cost 3,632 7,860 Premises and equipment, net 35,118 21,762 Bank-owned life insurance 48,903 42,651 Goodwill 2,589 2,589 Other intangible assets 48 76 Deferred income taxes, net 7,718 11,300 Other assets 33,181 42,770 Total assets $ 2,226,688 $ 2,253,747 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits Noninterest bearing deposits $ 338,705 $ 270,235 Interest bearing deposits 1,544,118 1,557,081 Total deposits 1,882,823 1,827,316 Advances from the Federal Home Loan Bank 80,000 175,000 Subordinated debentures (face value of $ 15,500 and $ 25,500 at September 30, 2021 and December 31, 2020, respectively, less unamortized debt issuance costs of $ 126 and $ 242 at September 30, 2021 and December 31, 2020, respectively) 15,374 25,258 Accrued expenses and other liabilities 52,314 49,571 Total liabilities 2,030,511 2,077,145 Commitments and contingencies Shareholders' equity Common stock, no par value; 10,000,000 shares authorized, 7,842,824 and 7,919,278 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively 119,588 121,338 Retained earnings 85,992 70,839 Accumulated other comprehensive loss ( 9,403 ) ( 15,575 ) Total shareholders' equity 196,177 176,602 Total liabilities and shareholders' equity $ 2,226,688 $ 2,253,747 See accompanying notes to consolidated financial statements (unaudited) 4 Bankwell Financial Group, Inc. Consolidated Statements of Income – (unaudited) (In thousands, except share data) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Interest and dividend income Interest and fees on loans $ 19,795 $ 18,027 $ 56,961 $ 55,471 Interest and dividends on securities 731 799 2,236 2,402 Interest on cash and cash equivalents 88 96 286 468 Total interest and dividend income 20,614 18,922 59,483 58,341 Interest expense Interest expense on deposits 2,387 4,104 8,245 14,623 Interest expense on borrowings 503 1,210 2,280 3,187 Total interest expense 2,890 5,314 10,525 17,810 Net interest income 17,724 13,608 48,958 40,531 Provision (credit) for loan losses 134 712 ( 182 ) 6,896 Net interest income after provision (credit) for loan losses 17,590 12,896 49,140 33,635 Noninterest income Gains and fees from sales of loans 924 27 2,251 27 Bank-owned life insurance 271 242 753 726 Service charges and fees 199 190 615 578 Gain on sale of other real estate owned, net — 19 — 19 Other 43 136 1,213 913 Total noninterest income 1,437 614 4,832 2,263 Noninterest expense Salaries and employee benefits 4,782 5,295 13,511 15,902 Occupancy and equipment 2,615 2,266 8,271 6,410 Data processing 632 529 1,977 1,558 Professional services 498 374 1,632 1,519 Director fees 324 301 968 883 FDIC insurance 298 176 1,001 529 Marketing 186 151 317 512 Other 1,035 637 2,383 1,797 Total noninterest expense 10,370 9,729 30,060 29,110 Income before income tax expense 8,657 3,781 23,912 6,788 Income tax expense 1,802 790 5,140 1,220 Net income $ 6,855 $ 2,991 $ 18,772 $ 5,568 Earnings Per Common Share: Basic $ 0.88 $ 0.38 $ 2.38 $ 0.71 Diluted $ 0.87 $ 0.38 $ 2.37 $ 0.71 Weighted Average Common Shares Outstanding: Basic 7,677,822 7,721,247 7,721,943 7,728,798 Diluted 7,738,758 7,721,459 7,779,632 7,749,199 Dividends per common share $ 0.18 $ 0.14 $ 0.46 $ 0.42 See accompanying notes to consolidated financial statements (unaudited) 5 Bankwell Financial Group, Inc. Consolidated Statements of Comprehensive Income (Loss) – (unaudited) (In thousands) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net income $ 6,855 $ 2,991 $ 18,772 $ 5,568 Other comprehensive income (loss): Unrealized (losses) gains on securities: Unrealized holding (losses) gains on available for sale securities ( 411 ) ( 97 ) ( 743 ) 2,661 Reclassification adjustment for gain realized in net income — — — — Net change in unrealized (losses) gains ( 411 ) ( 97 ) ( 743 ) 2,661 Income tax benefit (expense) 92 21 162 ( 589 ) Unrealized (losses) gains on securities, net of tax ( 319 ) ( 76 ) ( 581 ) 2,072 Unrealized gains (losses) on interest rate swaps: Unrealized gains (losses) on interest rate swaps 1,436 2,070 8,671 ( 16,400 ) Income tax (expense) benefit ( 321 ) ( 451 ) ( 1,918 ) 3,654 Unrealized gains (losses) on interest rate swaps, net of tax 1,115 1,619 6,753 ( 12,746 ) Total other comprehensive income (loss), net of tax 796 1,543 6,172 ( 10,674 ) Comprehensive income (loss) $ 7,651 $ 4,534 $ 24,944 $ ( 5,106 ) See accompanying notes to consolidated financial statements (unaudited) 6 Bankwell Financial Group, Inc. Consolidated Statements of Shareholders' Equity – (unaudited) (In thousands, except share data) Number of Outstanding Shares Common Stock Retained Earnings Accumulated Other Comprehensive Loss Total Balance at June 30, 2021 7,895,101 $ 120,451 $ 80,543 $ ( 10,199 ) $ 190,795 Net income — — 6,855 — 6,855 Other comprehensive income, net of tax — — — 796 796 Cash dividends declared ($ 0.18 per share) — — ( 1,406 ) — ( 1,406 ) Stock-based compensation expense — 562 — — 562 Repurchase of common stock ( 52,277 ) ( 1,425 ) — — ( 1,425 ) Balance at September 30, 2021 7,842,824 $ 119,588 $ 85,992 $ ( 9,403 ) $ 196,177 Number of Outstanding Shares Common Stock Retained Earnings Accumulated Other Comprehensive Loss Total Balance at June 30, 2020 7,887,503 $ 120,381 $ 69,712 $ ( 19,733 ) $ 170,360 Net income — — 2,991 — 2,991 Other comprehensive income, net of tax — — — 1,543 1,543 Cash dividends declared ($ 0.14 per share) — — ( 1,100 ) — ( 1,100 ) Stock-based compensation expense — 473 — — 473 Issuance of restricted stock 9,000 — — — — Balance at September 30, 2020 7,896,503 $ 120,854 $ 71,603 $ ( 18,190 ) $ 174,267 See accompanying notes to consolidated financial statements (unaudited) 7 Bankwell Financial Group, Inc. Consolidated Statements of Shareholders' Equity – (continued) (In thousands, except share data) Number of Outstanding Shares Common Stock Retained Earnings Accumulated Other Comprehensive Loss Total Balance at December 31, 2020 7,919,278 $ 121,338 $ 70,839 $ ( 15,575 ) $ 176,602 Net income — — 18,772 — 18,772 Other comprehensive income, net of tax — — — 6,172 6,172 Cash dividends declared ($ 0.46 per share) — — ( 3,619 ) — ( 3,619 ) Stock-based compensation expense — 1,418 — — 1,418 Forfeitures of restricted stock ( 150 ) — — — — Issuance of restricted stock 51,628 — — — — Stock options exercised 3,500 53 — — 53 Repurchase of common stock ( 131,432 ) ( 3,221 ) — — ( 3,221 ) Balance at September 30, 2021 7,842,824 $ 119,588 $ 85,992 $ ( 9,403 ) $ 196,177 Number of Outstanding Shares Common Stock Retained Earnings Accumulated Other Comprehensive Loss Total Balance at December 31, 2019 7,868,803 $ 120,589 $ 69,324 $ ( 7,516 ) $ 182,397 Net income — — 5,568 — 5,568 Other comprehensive loss, net of tax — — — ( 10,674 ) ( 10,674 ) Cash dividends declared ($ 0.42 per share) — — ( 3,289 ) — ( 3,289 ) Stock-based compensation expense — 1,286 — — 1,286 Forfeitures of restricted stock ( 1,500 ) — — — — Issuance of restricted stock 86,199 — — — — Stock options exercised 1,500 16 — — 16 Repurchase of common stock ( 58,499 ) ( 1,037 ) — — ( 1,037 ) Balance at September 30, 2020 7,896,503 $ 120,854 $ 71,603 $ ( 18,190 ) $ 174,267 See accompanying notes to consolidated financial statements (unaudited) 8 Bankwell Financial Group, Inc. Consolidated Statements of Cash Flows – (unaudited) (In thousands) Nine Months Ended September 30, 2021 2020 Cash flows from operating activities Net income $ 18,772 $ 5,568 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Net amortization of premiums and discounts on investment securities 162 47 (Credit) provision for loan losses ( 182 ) 6,896 Provision (credit) for deferred income taxes 1,827 ( 2,353 ) Change in fair value of marketable equity securities 40 ( 57 ) Depreciation and amortization 2,694 2,484 Amortization of debt issuance costs 116 39 Change in valuation allowance of right-of-use asset ( 280 ) — Increase in cash surrender value of bank-owned life insurance ( 753 ) ( 726 ) Gains and fees from sales of loans ( 2,251 ) ( 27 ) Stock-based compensation 1,418 1,286 Amortization of intangibles 28 54 Loss on sale of premises and equipment 195 — Gain on sale of other real estate owned, net — ( 19 ) Net change in: Deferred loan fees ( 420 ) 1,440 Accrued interest receivable ( 332 ) ( 1,335 ) Other assets 8,062 ( 20,322 ) Accrued expenses and other liabilities 1,056 ( 1,470 ) Net cash provided by (used in) operating activities 30,152 ( 8,495 ) Cash flows from investing activities Proceeds from principal repayments on available for sale securities 12,778 9,920 Proceeds from principal repayments on held to maturity securities 4,713 176 Net proceeds from sales and calls of available for sale securities — 2,200 Purchases of marketable equity securities ( 18 ) ( 28 ) Purchases of available for sale securities ( 12,649 ) ( 17,636 ) Purchases of held to maturity securities ( 4,736 ) — Purchases of bank-owned life insurance ( 5,500 ) — Net increase in loans ( 202,943 ) ( 20,452 ) Loan principal sold from loans not originated for sale ( 17,122 ) ( 214 ) Proceeds from sales of loans not originated for sale 19,373 241 Purchases of premises and equipment, net ( 4,080 ) ( 409 ) Reduction (purchase) of Federal Home Loan Bank stock 4,228 ( 385 ) Proceeds from the sale of other real estate owned — 199 Net cash used in investing activities ( 205,956 ) ( 26,388 ) See accompanying notes to consolidated financial statements (unaudited) 9 Bankwell Financial Group, Inc. Consolidated Statements of Cash Flows - (Continued) (In thousands) Nine Months Ended September 30, 2021 2020 Cash flows from financing activities Net change in time certificates of deposit $ ( 210,083 ) $ 89,072 Net change in other deposits 265,590 186,553 Net change in FHLB advances ( 95,000 ) 25,000 Repayment of subordinated debt ( 10,000 ) — Proceeds from exercise of options 53 16 Dividends paid on common stock ( 3,619 ) ( 3,289 ) Repurchase of common stock ( 3,221 ) ( 1,037 ) Net cash (used in) provided by financing activities ( 56,280 ) 296,315 Net (decrease) increase in cash and cash equivalents ( 232,084 ) 261,432 Cash and cash equivalents: Beginning of year 409,598 78,051 End of period $ 177,514 $ 339,483 Supplemental disclosures of cash flows information: Cash paid for: Interest $ 3,707 $ 18,067 Income taxes 4,024 3,393 Noncash investing and financing activities: Loans transferred to other real estate owned $ — $ 180 Net change in unrealized gains or losses on available for sale securities 743 2,661 Net change in unrealized gains or losses on interest rate swaps 8,671 ( 16,400 ) Establishment of right-of-use asset and lease liability 11,885 169 See accompanying notes to consolidated financial statements (unaudited) 10 1. Nature of Operations and Summary of Significant Accounting Policies Bankwell Financial Group, Inc. (the "Parent Corporation") is a bank holding company headquartered in New Canaan, Connecticut. The Parent Corporation offers a broad range of financial services through its banking subsidiary, Bankwell Bank (the "Bank" and, collectively with the Parent Corporation and the Parent Corporation's subsidiaries, the "Company"). The Bank is a Connecticut state chartered commercial bank, founded in 2002, whose deposits are insured under the Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation (“FDIC”). The Bank provides a wide range of services to customers in our primary market, an area encompassing approximately a 100 mile radius around our branch network. In addition, the Bank pursues certain types of commercial lending opportunities outside our primary market, particularly where we have strong relationships. The Bank operates branches in New Canaan, Stamford, Fairfield, Wilton, Westport, Darien, Norwalk, and Hamden, Connecticut. Principles of consolidation The consolidated financial statements include the accounts of the Company and the Bank, including its wholly owned passive investment company subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of estimates The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and general practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities as of the date of the consolidated balance sheet, and revenue and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the allowance for loan losses, the valuation of derivative instruments, investment securities valuation, evaluation of investment securities for other than temporary impairment and deferred income taxes valuation. The COVID-19 pandemic has resulted in significant economic disruption affecting our business and the clients we serve. As vaccination efforts continue, restrictions on businesses have been lifted and a return to more normal economic activity has begun. However, a significant degree of uncertainty still exists concerning the ultimate duration and magnitude of the COVID-19 pandemic and subsequent outbreaks, including whether restrictions that have been lifted will need to be imposed again or tightened in the future. Given the ongoing and dynamic nature of the circumstances, it is still difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, including but not limited to the continued roll-out of vaccinations, which play an important role as to when the coronavirus can be controlled and abated. Basis of consolidated financial statement presentation The unaudited consolidated financial statements presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and Rule 10-01 of Regulation S-X and do not include all of the information and note disclosures required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for the fair presentation of the accompanying unaudited interim consolidated financial statements have been included. Interim results are not necessarily reflective of the results that may be expected for the year ending December 31, 2021. The accompanying unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included on Form 10-K for the year ended December 31, 2020. Significant concentrations of credit risk Many of the Company's activities are with customers located in Connecticut and New York, with the majority of the Company's loans in Connecticut and some New York metro area counties. Declines in property values in these areas could significantly impact the Company. The Company has a significant concentration in commercial real estate loans. 11 Common Share Repurchases The Company is incorporated in the state of Connecticut. Connecticut law does not provide for treasury shares, rather shares repurchased by the Company constitute authorized, but unissued shares. GAAP states that accounting for treasury stock shall conform to state law. Therefore, the cost of shares repurchased by the Company has been allocated to common stock balances. Reclassification Certain prior period amounts may be reclassified to conform to the 2021 financial statement presentation. These reclassifications only change the reporting categories and do not affect the consolidated results of operations or consolidated financial position of the Company. Recent accounting pronouncements The following section includes changes in accounting principles and potential effects of new accounting guidance and pronouncements. Recently issued accounting pronouncements not yet adopted ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments.” This ASU changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward looking “expected loss” model that will replace today’s “incurred loss” model and can result in the earlier recognition of credit losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. On July 17, 2019, the FASB proposed deferring the effective date of ASC 326 for smaller reporting companies as defined by the SEC. The FASB proposed a three year deferral for smaller reporting companies, with an effective date of January 1, 2023. On October 16, 2019, the FASB voted in favor of finalizing its proposal to defer the effective date of this standard. The FASB issued ASU No. 2019-10, which officially delayed the adoption of this standard for smaller reporting companies until fiscal years beginning after December 15, 2022. The Company does qualify to defer the adoption of this standard and has not yet adopted this standard. Management continues to evaluate the impact of its future adoption of this guidance on the Company’s financial statements. ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): “Simplifying the Test for Goodwill Impairment.” This ASU simplifies the test for goodwill impairment by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity was required to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, this ASU also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. On October 16, 2019, the FASB voted in favor of a proposal to defer the effective date of this standard in the same manner it is deferring the effective date of ASC 326. The FASB issued ASU No. 2019-10, which officially delayed the adoption of this standard for smaller reporting companies until fiscal years beginning after December 15, 2022. The Company does qualify to defer the adoption of this standard and has not yet adopted this standard. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements. Recently adopted accounting pronouncements ASU No. 2020-04, Reference Rate Reform (Topic 848): "Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. Optional expedients include that modifications of contracts should be accounted for by prospectively adjusting the effective interest rate and modifications of leases should be accounted for as a continuation of the 12 existing contract with no reassessments of lease classification and discount rate or remeasurements of lease payments. This ASU also provides many practical expedients for derivative accounting. In addition, an entity may elect to sell and/or transfer held to maturity securities that reference a rate affected by the reference rate reform classified as held to maturity prior to January 1, 2020. In particular, the Company made the following elections as it relates to hedging relationships; (1) Option to not reassess a previous accounting determination (paragraph 848-20-35-2); (2) Option to not dedesignate a hedging relationship due to a change in critical term (paragraph 848-20-35-3); (3) Option to change the contractual terms of a hedging instrument, hedged item, or forecasted transaction and to not dedesignate a hedging relationship (paragraph 848-30-25-5); (4) Adopt expedient ASC 848-50-25-2 to assert probability of the hedged interest regardless of any expected modification in terms related to reference rate reform; and (5) To continue the method of assessing effectiveness as documented in the original hedge documentation and apply the expedient in ASC 848-50-35-17 so that the reference rate on the hypothetical derivative matches the reference rate on the hedging instrument. For new hedging relationships designated subsequent to December 31, 2020, the Company elects to apply the expedient in ASC 848-50-25-11 to assume that the reference rate will not be replaced for the remainder of the hedging relationship. The application of this guidance did not have a material impact on the Company's financial statements. 2. Investment Securities The amortized cost, gross unrealized gains and losses and fair value of available for sale and held to maturity securities at September 30, 2021 were as follows: September 30, 2021 Amortized Cost Gross Unrealized Fair Value Gains Losses (In thousands) Available for sale securities: U.S. Government and agency obligations Less than one year $ 9,995 $ 32 $ — $ 10,027 Due from one through five years 10,598 — ( 57 ) 10,541 Due from five through ten years 7,904 604 — 8,508 Due after ten years 42,780 1,674 ( 37 ) 44,417 Total U.S. Government and agency obligations 71,277 2,310 ( 94 ) 73,493 Corporate bonds Due from one through five years 1,000 17 — 1,017 Due from five through ten years 11,000 461 — 11,461 Due after ten years 1,500 94 — 1,594 Total corporate bonds 13,500 572 — 14,072 Total available for sale securities $ 84,777 $ 2,882 $ ( 94 ) $ 87,565 Held to maturity securities: State agency and municipal obligations Due after ten years $ 16,058 $ 2,518 $ ( 273 ) $ 18,303 Government-sponsored mortgage backed securities No contractual maturity 49 8 — 57 Total held to maturity securities $ 16,107 $ 2,526 $ ( 273 ) $ 18,360 13 The amortized cost, gross unrealized gains and losses and fair value of available for sale and held to maturity securities at December 31, 2020 were as follows: December 31, 2020 Amortized Cost Gross Unrealized Fair Value Gains Losses (In thousands) Available for sale securities: U.S. Government and agency obligations Less than one year $ 9,976 $ 172 $ — $ 10,148 Due from five through ten years 8,038 848 — 8,886 Due after ten years 55,560 2,284 — 57,844 Total U.S. Government and agency obligations 73,574 3,304 — 76,878 Corporate bonds Due from one through five years 4,000 57 — 4,057 Due from five through ten years 6,000 163 — 6,163 Due after ten years 1,500 7 — 1,507 Total corporate bonds 11,500 227 — 11,727 Total available for sale securities $ 85,074 $ 3,531 $ — $ 88,605 Held to maturity securities: State agency and municipal obligations Due after ten years $ 16,018 $ 3,944 $ — $ 19,962 Government-sponsored mortgage backed securities No contractual maturity 60 10 — 70 Total held to maturity securities $ 16,078 $ 3,954 $ — $ 20,032 There were no sales of investment securities during the three or nine months ended September 30, 2021 or 2020. At September 30, 2021 and December 31, 2020, none of the Company's securities were pledged as collateral with the Federal Home Loan Bank ("FHLB") or any other institution. As of September 30, 2021 and December 31, 2020, the actual durations of the Company's available for sale securities were significantly shorter than the stated maturities. As of September 30, 2021, the Company held marketable equity securities with a fair value of $ 2.2 million and an amortized cost of $ 2.1 million. At December 31, 2020, the Company held marketable equity securities with a fair value of $ 2.2 million and an amortized cost of $ 2.1 million. These securities represent an investment in mutual funds that have an objective to make investments for CRA purposes. There were no investment securities as of December 31, 2020, in which the fair value of the security was less than the amortized cost of the security. 14 The following table provides information regarding investment securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2021: Length of Time in Continuous Unrealized Loss Position Less Than 12 Months 12 Months or More Total Fair Value Unrealized Loss Percent Decline from Amortized Cost Fair Value Unrealized Loss Percent Decline from Amortized Cost Fair Value Unrealized Loss Percent Decline from Amortized Cost (Dollars in thousands) September 30, 2021 U.S. Government and agency obligations $ 18,519 $ ( 94 ) 0.50 % $ — $ — — % $ 18,519 $ ( 94 ) 0.50 % State agency and municipal obligations 4,392 ( 273 ) 5.85 — — — 4,392 ( 273 ) 5.85 Total investment securities $ 22,911 $ ( 367 ) 1.58 % $ — $ — — % $ 22,911 $ ( 367 ) 1.58 % There were three investment securities as of September 30, 2021, in which the fair value of the security was less than the amortized cost of the security. The U.S. Government and agency obligations owned are either direct obligations of the U.S. Government or guaranteed by the U.S. Government, therefore the contractual cash flows are guaranteed and as a result the unrealized losses in this portfolio are considered to be only temporarily impaired. The Company continually monitors its state agency and municipal bond portfolios and at this time these portfolios have minimal default risk because state agency and municipal bonds are all rated investment grade or deemed to be of investment grade quality. The Company has the intent and ability to retain its investment securities in an unrealized loss position at September 30, 2021 until the decline in value has recovered or the security has matured. 15 3. Loans Receivable and Allowance for Loan Losses The following table sets forth a summary of the loan portfolio at September 30, 2021 and December 31, 2020: (In thousands) September 30, 2021 December 31, 2020 Real estate loans: Residential $ 90,110 $ 113,557 Commercial 1,337,896 1,148,383 Construction 94,665 87,007 1,522,671 1,348,947 Commercial business (1) 292,825 276,601 Consumer 9,050 79 Total loans 1,824,546 1,625,627 Allowance for loan losses ( 16,803 ) ( 21,009 ) Deferred loan origination fees, net ( 2,526 ) ( 2,946 ) Loans receivable, net $ 1,805,217 $ 1,601,672 (1) The September 30, 2021 and December 31, 2020 balance includes $ 1.6 million and $ 34.8 million, respectively, of Paycheck Protection Program ("PPP") loans made under the CARES Act. Lending activities consist of commercial real estate loans, commercial business loans and, to a lesser degree, a variety of consumer loans. Loans may also be granted for the construction of commercial properties. The majority of commercial mortgage loans are collateralized by first or second mortgages on real estate. Risk management The Company has established credit policies applicable to each type of lending activity in which it engages. The Company evaluates the creditworthiness of each customer and extends credit of up to 80 % of the market value of the collateral, depending on the borrower's creditworthiness and the type of collateral. The borrower’s ability to service the debt is monitored on an ongoing basis. Real estate is the primary form of collateral. Other important forms of collateral are business assets, time deposits and marketable securities. While collateral provides assurance as a secondary source of repayment, the Company ordinarily requires the primary source of repayment for commercial loans to be based on the borrower’s ability to generate continuing cash flows. In the fourth quarter of 2017, management made the strategic decision to cease the origination of residential mortgage loans. At the beginning of the third quarter 2019, the Company no longer offered home equity loans or lines of credit. The Company’s policy for residential lending generally required that the amount of the loan may not exceed 80 % of the original appraised value of the property. In certain situations, the amount may have exceeded 80 % LTV either with private mortgage insurance being required for that portion of the residential loan in excess of 80 % of the appraised value of the property or where secondary financing is provided by a housing authority program second mortgage, a community’s low/moderate income housing program, or a religious or civic organization. 16 Credit quality of loans and the allowance for loan losses Management segregates the loan portfolio into defined segments, which are used to develop and document a systematic method for determining the Company's allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate. The Company's loan portfolio is segregated into the following portfolio segments: Residential Real Estate: This portfolio segment consists of first mortgage loans secured by one-to-four family owner occupied residential properties for personal use located in the Company's market area. This segment also includes home equity loans and home equity lines of credit secured by owner occupied one-to-four family residential properties. Loans of this type were written at a combined maximum of 80 % of the appraised value of the property and the Company requires a first or second lien position on the property. These loans can be affected by economic conditions and the values of the underlying properties. Commercial Real Estate: This portfolio segment includes loans secured by commercial real estate, multi-family dwellings, owner-occupied commercial real estate and investor-owned one-to-four family dwellings. Loans secured by commercial real estate generally have larger loan balances and more credit risk than owner occupied one-to-four family mortgage loans. Construction: This portfolio segment includes commercial construction loans for commercial development projects, including apartment buildings and condominiums, as well as office buildings, retail and other income producing properties and land loans, which are loans made with land as collateral. Construction and land development financing generally involves greater credit risk than long-term financing on improved, owner-occupied or leased real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, the Company may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment through sale or refinance. Construction loans also expose the Company to the risks that improvements will not be completed on time in accordance with specifications and projected costs and that repayment will depend on the successful operation or sale of the properties, which may cause some borrowers to be unable to continue paying debt service, which exposes the Company to greater risk of non-payment and loss. Commercial Business: This portfolio segment includes commercial business loans secured by assignments of corporate assets and personal guarantees of the business owners. Commercial business loans generally have higher interest rates and shorter terms than other loans, but they also have increased difficulty of loan monitoring and a higher risk of default since their repayment generally depends on the successful operation of the borrower’s business. This segment also includes Paycheck Protection Program ("PPP") loans made under the CARES Act to small businesses impacted by COVID-19, to cover payroll and other operating expenses. Loans extended under the PPP are fully guaranteed by the U.S. Small Business Administration ("SBA"). Consumer: This portfolio segment includes loans secured by savings or certificate accounts, automobiles, as well as unsecured personal loans and overdraft lines of credit. In addition, there are loans to finance insurance premiums, secured by the cash surrender value of life insurance and marketable securities. 17 Allowance for loan losses The following tables set forth the activity in the Company’s allowance for loan losses for the three and nine months ended September 30, 2021 and 2020, by portfolio segment: Residential Real Estate Commercial Real Estate Construction Commercial Business Consumer Total (In thousands) Three Months Ended September 30, 2021 Beginning balance $ 318 $ 13,209 $ 133 $ 2,976 $ 36 $ 16,672 Charge-offs — — — — ( 15 ) ( 15 ) Recoveries — — — 11 1 12 Provisions (credits) 158 37 9 ( 84 ) 14 134 Ending balance $ 476 $ 13,246 $ 142 $ 2,903 $ 36 $ 16,803 Residential Real Estate Commercial Real Estate Construction Commercial Business Consumer Total (In thousands) Three Months Ended September 30, 2020 Beginning balance $ 809 $ 14,409 $ 441 $ 4,003 $ — $ 19,662 Charge-offs — — — — ( 4 ) ( 4 ) Recoveries — — — — 2 2 (Credits) provisions ( 95 ) 491 ( 7 ) 321 2 712 Ending balance $ 714 $ 14,900 $ 434 $ 4,324 $ — $ 20,372 Residential Real Estate Commercial Real Estate Construction Commercial Business Consumer Total (In thousands) Nine Months Ended September 30, 2021 Beginning balance $ 610 $ 16,425 $ 221 $ 3,753 $ — $ 21,009 Charge-offs — ( 3,977 ) — ( 51 ) ( 33 ) ( 4,061 ) Recoveries — — — 27 10 37 (Credits) provisions ( 134 ) 798 ( 79 ) ( 826 ) 59 ( 182 ) Ending balance $ 476 $ 13,246 $ 142 $ 2,903 $ 36 $ 16,803 Residential Real Estate Commercial Real Estate Construction Commercial Business Consumer Total (In thousands) Nine Months Ended September 30, 2020 Beginning balance $ 730 $ 10,551 $ 324 $ 1,903 $ 1 $ 13,509 Charge-offs — — — ( 7 ) ( 29 ) ( 36 ) Recoveries — — — 1 2 3 (Credits) provisions ( 16 ) 4,349 110 2,427 26 6,896 Ending balance $ 714 $ 14,900 $ 434 $ 4,324 $ — $ 20,372 18 Loans evaluated for impairment and the related allowance for loan losses as of September 30, 2021 and December 31, 2020 were as follows: Portfolio Allowance (In thousands) September 30, 2021 Loans individually evaluated for impairment: Residential real estate $ 4,817 $ 189 Commercial real estate 31,489 2,618 Construction 8,997 — Commercial business 4,731 65 Subtotal 50,034 2,872 Loans collectively evaluated for impairment: Residential real estate 85,293 287 Commercial real estate 1,306,407 10,628 Construction 85,668 142 Commercial business 288,094 2,838 Consumer 9,050 36 Subtotal 1,774,512 13,931 Total $ 1,824,546 $ 16,803 Portfolio Allowance (In thousands) December 31, 2020 Loans individually evaluated for impairment: Residential real estate $ 4,604 $ — Commercial real estate 37,579 4,960 Construction 8,997 — Commercial business 6,507 85 Subtotal 57,687 5,045 Loans collectively evaluated for impairment: Residential real estate 108,953 610 Commercial real estate 1,110,804 11,465 Construction 78,010 221 Commercial business 270,094 3,668 Consumer 79 — Subtotal 1,567,940 15,964 Total $ 1,625,627 $ 21,009 As of December 31, 2020, $ 57.7 million of loans were individually evaluated for impairment and $ 10.0 million of these loans were determined not impaired. Credit quality indicators To measure credit risk for the loan portfolios, the Company employs a credit risk rating system. This risk rating represents an assessed level of a loan’s risk based on the character and creditworthiness of the borrower/guarantor, the capacity of the borrower to adequately service the debt, any credit enhancements or additional sources of repayment, and the quality, value and coverage of the collateral, if any. 19 The objectives of the Company’s risk rating system are to provide the Board of Directors and senior management with an objective assessment of the overall quality of the loan portfolio, to promptly and accurately identify loans with well-defined credit weaknesses so that timely action can be taken to minimize a potential credit loss, to identify relevant trends affecting the collectability of the loan portfolio, to isolate potential problem areas and to provide essential information for determining the adequacy of the allowance for loan losses. The Company’s credit risk rating system has nine grades, with each grade corresponding to a progressively greater risk of default. Risk ratings of (1) through (5) are "pass" categories and risk ratings of (6) through (9) are criticized asset categories as defined by the regulatory agencies. A “special mention” (6) credit has a potential weakness which, if uncorrected, may result in a deterioration of the repayment prospects or inadequately protect the Company’s credit position at some time in the future. “Substandard” (7) loans are credits that have a well-defined weakness or weaknesses that jeopardize the full repayment of the debt. An asset rated “doubtful” (8) has all the weaknesses inherent in a substandard asset and which, in addition, make collection or liquidation in full highly questionable and improbable when considering existing facts, conditions, and values. Loans classified as “loss” (9) are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value; rather, it is not practical or desirable to defer writing-off this asset even though partial recovery may be made in the future. Risk ratings are assigned as necessary to differentiate risk within the portfolio. They are reviewed on an ongoing basis through the annual loan review process performed by Company personnel, normal renewal activity and the quarterly watchlist and watched asset report process. They are revised to reflect changes in the borrower's financial condition and outlook, debt service coverage capability, repayment performance, collateral value and coverage, as well as other considerations. In addition to internal review at multiple points, outsourced loan review opines on risk ratings with regard to the sample of loans their review covers. 20 The following tables present credit risk ratings by loan segment as of September 30, 2021 and December 31, 2020: Commercial Credit Quality Indicators September 30, 2021 December 31, 2020 Commercial Real Estate Construction Commercial Business Total Commercial Real Estate Construction Commercial Business Total (In thousands) Pass $ 1,287,568 $ 85,668 $ 286,641 $ 1,659,877 $ 1,105,825 $ 78,010 $ 269,728 $ 1,453,563 Special Mention 18,839 — 1,454 20,293 12,560 — 2,055 14,615 Substandard 31,072 8,997 3,198 43,267 29,998 8,997 3,247 42,242 Doubtful 417 — 1,532 1,949 — — 1,571 1,571 Loss — — — — — — — — Total loans $ 1,337,896 $ 94,665 $ 292,825 $ 1,725,386 $ 1,148,383 $ 87,007 $ 276,601 $ 1,511,991 Residential and Consumer Credit Quality Indicators September 30, 2021 December 31, 2020 Residential Real Estate Consumer Total Residential Real Estate Consumer Total (In thousands) Pass $ 85,293 $ 9,050 $ 94,343 $ 108,953 $ 79 $ 109,032 Special Mention — — — 713 — 713 Substandard 4,642 — 4,642 3,714 — 3,714 Doubtful 175 — 175 177 — 177 Loss — — — — — — Total loans $ 90,110 $ 9,050 $ 99,160 $ 113,557 $ 79 $ 113,636 Loan portfolio aging analysis When a loan is 15 days past due, the Company sends the borrower a late notice. The Company attempts to contact the borrower by phone if the delinquency is not corrected promptly after the notice has been sent. When the loan is 30 days past due, the Company mails the borrower a letter reminding the borrower of the delinquency, and attempts to contact the borrower personally to determine the reason for the delinquency and ensure the borrower understands the terms of the loan. If necessary, after the 90th day of delinquency, the Company may take other appropriate legal action. A summary report of all loans 30 days or more past due is provided to the Board of Directors of the Company periodically. Loans greater than 90 days past due are generally put on nonaccrual status. A nonaccrual loan is restored to accrual status when it is no longer delinquent and collectability of interest and principal is no longer in doubt. A loan is considered to be no longer delinquent when timely payments are made for a period of at least six months (one year for loans providing for quarterly or semi-annual payments) by the borrower in accordance with the contractual terms. Loans that are granted payment deferrals under the CARES Act are not required to be reported as past due or placed on non-accrual status if the criteria under section 4013 of the CARES Act is met. As of September 30, 2021, no loans remained on active deferral under the CARES Act. 21 The following tables set forth certain information with respect to the Company's loan portfolio delinquencies by portfolio segment as of September 30, 2021 and December 31, 2020: September 30, 2021 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Past Due Total Past Due Current Total Loans (In thousands) Real estate loans: Residential real estate $ 1,535 $ 703 $ 176 $ 2,414 $ 87,696 $ 90,110 Commercial real estate 877 10,500 5,013 16,390 1,321,506 1,337,896 Construction — — 8,997 8,997 85,668 94,665 Commercial business — 1,463 1,485 2,948 289,877 292,825 Consumer — — — — 9,050 9,050 Total loans $ 2,412 $ 12,666 $ 15,671 $ 30,749 $ 1,793,797 $ 1,824,546 December 31, 2020 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Past Due Total Past Due Current Total Loans (In thousands) Real estate loans: Residential real estate $ 245 $ — $ 177 $ 422 $ 113,135 $ 113,557 Commercial real estate 1,305 193 2,541 4,039 1,144,344 1,148,383 Construction 8,997 — — 8,997 78,010 87,007 Commercial business 45 55 1,526 1,626 274,975 276,601 Consumer — — — — 79 79 Total loans $ 10,592 $ 248 $ 4,244 $ 15,084 $ 1,610,543 $ 1,625,627 There were no loans delinquent greater than 90 days and still accruing interest as of September 30, 2021 and December 31, 2020. Loans on nonaccrual status The following is a summary of nonaccrual loans by portfolio segment as of September 30, 2021 and December 31, 2020: September 30, 2021 December 31, 2020 (In thousands) Residential real estate $ 1,849 $ 1,492 Commercial real estate 16,314 21,093 Commercial business 1,754 1,834 Construction 8,997 8,997 Total $ 28,914 $ 33,416 Interest income on loans that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms for the nine months ended September 30, 2021 and 2020 was $ 0.9 million and $ 0.6 million, respectively. There was $ 49 thousand and no interest income recognized on these loans for the nine months ended September 30, 2021 and 2020, respectively. At September 30, 2021 and December 31, 2020, there were no commitments to lend additional funds to any borrower on nonaccrual status. Nonaccrual loans with no specific reserve totaled $ 16.1 million and $ 17.5 million at September 30, 2021 and December 31, 2020, respectively, as these loans were deemed to be adequately collateralized. 22 Impaired loans An impaired loan is generally one for which it is probable, based on current information, that the Company will not collect all the amounts due in accordance with the contractual terms of the loan. Impaired loans are individually evaluated for impairment. When the Company classifies a problem loan as impaired, it evaluates whether a specific valuation allowance is required for that portion of the asset that is estimated to be impaired. The following table summarizes impaired loans by portfolio segment as of September 30, 2021 and December 31, 2020: Carrying Amount Unpaid Principal Balance Associated Allowance September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020 (In thousands) Impaired loans without a valuation allowance: Residential real estate $ 3,048 $ 3,891 $ 3,224 $ 4,108 $ — $ — Commercial real estate 10,137 8,964 10,490 9,282 — — Construction 8,997 8,997 8,997 8,997 — — Commercial business 1,971 1,899 2,608 2,512 — — Total impaired loans without a valuation allowance 24,153 23,751 25,319 24,899 — — Impaired loans with a valuation allowance: Residential real estate $ 1,769 $ — $ 1,769 $ — $ 189 $ — Commercial real estate 21,352 21,035 21,394 21,049 2,618 4,960 Commercial business 2,760 2,920 2,760 2,922 65 85 Total impaired loans with a valuation allowance 25,881 23,955 25,923 23,971 2,872 5,045 Total impaired loans $ 50,034 $ 47,706 $ 51,242 $ 48,870 $ 2,872 $ 5,045 23 The following tables summarize the average carrying amount of impaired loans and interest income recognized on impaired loans by portfolio segment for the three and nine months ended September 30, 2021 and 2020: Average Carrying Amount Interest Income Recognized Three Months Ended September 30, Three Months Ended September 30, 2021 2020 2021 2020 (In thousands) Impaired loans without a valuation allowance: Residential real estate $ 3,058 $ 4,035 $ 13 $ 16 Commercial real estate 10,153 7,376 72 37 Commercial business 1,987 4,123 5 5 Construction 8,997 — — — Total impaired loans without a valuation allowance 24,195 15,534 90 58 Impaired loans with a valuation allowance: Residential real estate $ 1,775 $ — $ 12 $ — Commercial real estate 20,301 6,259 62 78 Commercial business 2,763 30 18 — Total impaired loans with a valuation allowance 24,839 6,289 92 78 Total impaired loans $ 49,034 $ 21,823 $ 182 $ 136 Average Carrying Amount Interest Income Recognized Nine Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In thousands) Impaired loans without a valuation allowance: Residential real estate $ 3,080 $ 4,083 $ 28 $ 70 Commercial real estate 10,121 7,513 435 109 Commercial business 2,018 4,173 18 15 Construction 8,997 — — — Total impaired loans without a valuation allowance 24,216 15,769 481 194 Impaired loans with a valuation allowance: Residential real estate $ 1,791 $ — $ 40 $ — Commercial real estate 22,386 6,278 490 204 Commercial business 2,772 30 76 — Total impaired loans with a valuation allowance 26,949 6,308 606 204 Total impaired loans $ 51,165 $ 22,077 $ 1,087 $ 398 Troubled debt restructurings ("TDRs") Modifications to a loan are considered to be a troubled debt restructuring when both of the following conditions are met: 1) the borrower is experiencing financial difficulties and 2) the modification constitutes a concession that is not in line with market rates and/or terms. Modified terms are dependent upon the financial position and needs of the individual borrower. Troubled debt restructurings are classified as impaired loans. 24 If a performing loan is restructured into a TDR, it remains in performing status. If a nonperforming loan is restructured into a TDR, it continues to be carried in nonaccrual status. Nonaccrual classification may be removed if the borrower demonstrates compliance with the modified terms for a minimum of six months. Loans classified as TDRs totaled $ 26.9 million at September 30, 2021 and $ 9.1 million at December 31, 2020. The following tables provide information on loans that were modified as TDRs during the periods indicated. Number of Loans Pre-Modification Post-Modification (Dollars in thousands) 2021 2020 2021 2020 2021 2020 Three Months Ended September 30, Commercial real estate 1 — $ 10,317 $ — $ 10,402 $ — Total 1 — $ 10,317 $ — $ 10,402 $ — Number of Loans Pre-Modification Post-Modification (Dollars in thousands) 2021 2020 2021 2020 2021 2020 Nine Months Ended September 30, Residential real estate 2 — $ 764 $ — $ 764 $ — Commercial business 1 — 2,567 — 2,655 — Commercial real estate 2 — 13,534 — 13,570 — Total 5 — $ 16,865 $ — $ 16,989 $ — At September 30, 2021 and December 31, 2020, there were five nonaccrual loans identified as TDRs totaling $ 12.4 million and three nonaccrual loans identified as TDRs totaling $ 1.4 million, respectively. There were no loans modified in a troubled debt restructuring that re-defaulted during the nine months ended September 30, 2021 and September 30, 2020. The following table provides information on how loans were modified as TDRs during the three and nine months ended September 30, 2021 and September 30, 2020. Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In thousands) Payment concession $ — $ — $ 764 $ — Maturity, rate and payment concession 10,402 — 13,057 — Rate concession — — 3,168 — Total $ 10,402 $ — $ 16,989 $ — Section 4013 of the CARES Act provides relief from certain requirements under GAAP and permits a financial institution to elect to suspend troubled debt restructuring accounting, in certain circumstances, beginning March 1, 2020 and ending on the earlier of January 1, 2022, or sixty days after the national emergency concerning COVID-19 terminates. All short term loan modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any request for relief are not considered TDRs. 25 4. Shareholders' Equity Common Stock The Company has 10,000,000 shares authorized and 7,842,824 shares issued and outstanding at September 30, 2021 and 10,000,000 shares authorized and 7,919,278 shares issued and outstanding at December 31, 2020. The Company's stock is traded on the NASDAQ stock market under the ticker symbol BWFG. Dividends The Company’s shareholders are entitled to dividends when and if declared by the Board of Directors out of funds legally available. The ability of the Company to pay dividends depends, in part, on the ability of the Bank to pay dividends to the Company. In accordance with Connecticut statutes, regulatory approval is required to pay dividends in excess of the Bank’s profits retained in the current year plus retained profits from the previous two years. The Bank is also prohibited from paying dividends that would reduce its capital ratios below minimum regulatory requirements. Issuer Purchases of Equity Securities On December 19, 2018, the Company's Board of Directors authorized a share repurchase program of up to 400,000 shares of the Company's Common Stock. The Company intends to accomplish the share repurchases through open market transactions, though the Company could accomplish repurchases through other means, such as privately negotiated transactions. The timing, price and volume of repurchases will be based on market conditions, relevant securities laws and other factors. The share repurchase plan does not obligate the Company to acquire any particular amount of Common Stock, and it may be modified or suspended at any time at the Company's discretion. During the nine months ended September 30, 2021, the Company purchased 131,432 shares of its Common Stock at a weighted average price of $ 24.50 per share. During the year ended December 31, 2020, the Company purchased 58,499 shares of its Common Stock at a weighted average price of $ 17.69 per share. 5. Comprehensive Income Comprehensive income represents the sum of net income and items of other comprehensive income or loss, including net unrealized gains or losses on securities available for sale and net unrealized gains or losses on derivatives. The Company's derivative instruments are utilized to manage economic risks, including interest rate risk. Changes in fair value of the Company's derivatives are primarily driven by changes in interest rates and recognized in other comprehensive income. The Company's current derivative positions will cause a decrease to other comprehensive income in a falling interest rate environment and an increase in a rising interest rate environment. The Company’s total comprehensive income or loss for the three and nine months ended September 30, 2021 and September 30, 2020 is reported in the Consolidated Statements of Comprehensive Income. 26 The following tables present the changes in accumulated other comprehensive income (loss) by component, net of tax for the three and nine months ended September 30, 2021 and September 30, 2020: Net Unrealized Gain (Loss) on Available for Sale Securities Net Unrealized Gain (Loss) on Interest Rate Swaps Total (In thousands) Balance at June 30, 2021 $ 2,482 $ ( 12,681 ) $ ( 10,199 ) Other comprehensive (loss) income before reclassifications, net of tax ( 319 ) 400 81 Amounts reclassified from accumulated other comprehensive income, net of tax — 715 715 Net other comprehensive (loss) income ( 319 ) 1,115 796 Balance at September 30, 2021 $ 2,163 $ ( 11,566 ) $ ( 9,403 ) Net Unrealized Gain (Loss) on Available for Sale Securities Net Unrealized Gain (Loss) on Interest Rate Swaps Total (In thousands) Balance at June 30, 2020 $ 3,076 $ ( 22,809 ) $ ( 19,733 ) Other comprehensive (loss) income before reclassifications, net of tax ( 76 ) 977 901 Amounts reclassified from accumulated other comprehensive income, net of tax — 642 642 Net other comprehensive (loss) income ( 76 ) 1,619 1,543 Balance at September 30, 2020 $ 3,000 $ ( 21,190 ) $ ( 18,190 ) Net Unrealized Gain (Loss) on Available for Sale Securities Net Unrealized Gain (Loss) on Interest Rate Swaps Total (In thousands) Balance at December 31, 2020 $ 2,744 $ ( 18,319 ) $ ( 15,575 ) Other comprehensive (loss) income before reclassifications, net of tax ( 581 ) 4,575 3,994 Amounts reclassified from accumulated other comprehensive income, net of tax — 2,178 2,178 Net other comprehensive (loss) income ( 581 ) 6,753 6,172 Balance at September 30, 2021 $ 2,163 $ ( 11,566 ) $ ( 9,403 ) Net Unrealized Gain (Loss) on Available for Sale Securities Net Unrealized Gain (Loss) on Interest Rate Swaps Total (In thousands) Balance at December 31, 2019 $ 928 $ ( 8,444 ) $ ( 7,516 ) Other comprehensive income (loss) before reclassifications, net of tax 2,072 ( 13,643 ) ( 11,571 ) Amounts reclassified from accumulated other comprehensive income, net of tax — 897 897 Net other comprehensive income (loss) 2,072 ( 12,746 ) ( 10,674 ) Balance at September 30, 2020 $ 3,000 $ ( 21,190 ) $ ( 18,190 ) 27 The following table provides information for the items reclassified from accumulated other comprehensive income or loss: Accumulated Other Comprehensive Income Components Three Months Ended September 30, Nine Months Ended September 30, Associated Line Item in the Consolidated Statements of Income 2021 2020 2021 2020 (In thousands) Derivatives: Unrealized losses on derivatives $ ( 921 ) $ ( 821 ) $ ( 2,796 ) $ ( 1,154 ) Interest expense on borrowings Tax benefit 206 179 618 257 Income tax expense Net of tax $ ( 715 ) $ ( 642 ) $ ( 2,178 ) $ ( 897 ) 6. Earnings per share ("EPS") Unvested restricted stock awards that contain non-forfeitable rights to dividends are participating securities and are included in the computation of EPS pursuant to the two-class method. The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. The Company’s unvested restricted stock awards qualify as participating securities. Net income is allocated between the common stock and participating securities pursuant to the two-class method. Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period, excluding participating unvested restricted stock awards. Diluted EPS is computed in a similar manner, except that the denominator includes the number of additional common shares that would have been outstanding if potentially dilutive common shares were issued using the treasury stock method. The following table is a reconciliation of earnings available to common shareholders and basic weighted average common shares outstanding to diluted weighted average common shares outstanding, reflecting the application of the two-class method: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In thousands, except per share data) Net income $ 6,855 $ 2,991 $ 18,772 $ 5,568 Dividends to participating securities (1) ( 27 ) ( 19 ) ( 71 ) ( 52 ) Undistributed earnings allocated to participating securities (1) ( 104 ) ( 32 ) ( 292 ) ( 34 ) Net income for earnings per share calculation $ 6,724 $ 2,940 $ 18,409 $ 5,482 Weighted average shares outstanding, basic 7,678 7,721 7,722 7,729 Effect of dilutive equity-based awards (2) 61 — 58 20 Weighted average shares outstanding, diluted 7,739 7,721 7,780 7,749 Net earnings per common share: Basic earnings per common share $ 0.88 $ 0.38 $ 2.38 $ 0.71 Diluted earnings per common share $ 0.87 $ 0.38 $ 2.37 $ 0.71 Awards excluded from the calculation of diluted EPS (3) : Stock options — 15 — — (1) Represents dividends paid and undistributed earnings allocated to unvested stock-based awards that contain non-forfeitable rights to dividends. (2) Represents the effect of the assumed exercise of stock options and the vesting of restricted shares, as applicable, utilizing the treasury stock method. 28 (3) Represents stock-based awards not included in the computation of potential common shares for purposes of calculating diluted EPS as the exercise prices were greater than the average market price of the Company's common stock, and, therefore, are considered anti-dilutive. 7. Regulatory Matters The Federal Reserve, the FDIC and the other federal and state bank regulatory agencies establish regulatory capital guidelines for U.S. banking organizations. As of January 1, 2015, the Company and the Bank became subject to new capital rules set forth by the Federal Reserve, the FDIC and the other federal and state bank regulatory agencies. The capital rules revise the banking agencies’ leverage and risk-based capital requirements and the method for calculating risk weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act (the Basel III Capital Rules). The Basel III Capital Rules establish a minimum Common Equity Tier 1 capital requirement of 4.5 % of risk-weighted assets; set the minimum leverage ratio at 4.0 % of total assets; increased the minimum Tier 1 capital to risk-weighted assets requirement from 4.0 % to 6.0 %; and retained the minimum total capital to risk weighted assets requirement at 8.0 %. A “well-capitalized” institution must generally maintain capital ratios 100 - 200 basis points higher than the minimum guidelines. The Basel III Capital Rules also change the risk weights assigned to certain assets. The Basel III Capital Rules assigned a higher risk weight ( 150 %) to loans that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The Basel III Capital Rules also alter the risk weighting for other assets, including marketable equity securities that are risk weighted generally at 300 %. The Basel III Capital Rules require certain components of accumulated other comprehensive income (loss) to be included for purposes of calculating regulatory capital requirements unless a one-time opt-out is exercised. The Bank did exercise its opt-out option and excludes the unrealized gain (loss) on investment securities component of accumulated other comprehensive income (loss) from regulatory capital. The Basel III Capital Rules limit a banking organization’s capital distributions and certain discretionary bonus payments to executive officers if the banking organization does not hold a “capital conservation buffer” of 2.5 % in addition to the minimum risk based capital requirement. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. As of September 30, 2021, the Bank and Company met all capital adequacy requirements to which they are subject. There are no conditions or events since then that management believes have changed this conclusion. The capital amounts and ratios for the Bank and the Company at September 30, 2021 and December 31, 2020 were as follows: 29 Minimum Regulatory Capital Required for Capital Adequacy plus Capital Conservation Buffer Minimum Regulatory Capital to be Well Capitalized Under Prompt Corrective Action Provisions Actual Capital (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Bankwell Bank September 30, 2021 Common Equity Tier 1 Capital to Risk-Weighted Assets $ 213,091 10.59 % $ 140,789 7.00 % $ 130,733 6.50 % Total Capital to Risk-Weighted Assets 230,049 11.44 % 211,184 10.50 % 201,127 10.00 % Tier I Capital to Risk-Weighted Assets 213,091 10.59 % 170,958 8.50 % 160,902 8.00 % Tier I Capital to Average Assets 213,091 9.61 % 88,680 4.00 % 110,850 5.00 % Bankwell Financial Group, Inc. September 30, 2021 Common Equity Tier 1 Capital to Risk-Weighted Assets $ 202,394 10.02 % $ 141,344 7.00 % N/A N/A Total Capital to Risk-Weighted Assets 231,878 11.48 % 212,016 10.50 % N/A N/A Tier I Capital to Risk-Weighted Assets 202,394 10.02 % 171,632 8.50 % N/A N/A Tier I Capital to Average Assets 202,394 9.12 % 88,813 4.00 % N/A N/A Minimum Regulatory Capital Required for Capital Adequacy plus Capital Conservation Buffer Minimum Regulatory Capital to be Well Capitalized Under Prompt Corrective Action Provisions Actual Capital (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Bankwell Bank December 31, 2020 Common Equity Tier 1 Capital to Risk-Weighted Assets $ 191,579 11.06 % $ 121,216 7.00 % $ 112,558 6.50 % Total Capital to Risk-Weighted Assets 212,588 12.28 % 181,825 10.50 % 173,166 10.00 % Tier I Capital to Risk-Weighted Assets 191,579 11.06 % 147,191 8.50 % 138,533 8.00 % Tier I Capital to Average Assets 191,579 8.44 % 90,836 4.00 % 113,545 5.00 % Bankwell Financial Group, Inc. December 31, 2020 Common Equity Tier 1 Capital to Risk-Weighted Assets $ 189,529 10.93 % $ 121,408 7.00 % N/A N/A Total Capital to Risk-Weighted Assets 230,696 13.30 % 182,111 10.50 % N/A N/A Tier I Capital to Risk-Weighted Assets 189,529 10.93 % 147,423 8.50 % N/A N/A Tier I Capital to Average Assets 189,529 8.34 % 90,916 4.00 % N/A N/A 30 Regulatory Restrictions on Dividends The ability of the Company to pay dividends depends, in part, on the ability of the Bank to pay dividends to the Company. In accordance with Connecticut statutes, regulatory approval is required to pay dividends in excess of the Bank’s profits retained in the current year plus retained profits from the previous two years. The Bank is also prohibited from paying dividends that would reduce its capital ratios below minimum regulatory requirements. Reserve Requirements on Cash The Bank was not required to maintain a minimum reserve balance in the Federal Reserve Bank (FRB) at September 30, 2021 or December 31, 2020 as the FRB has waived this requirement due to the COVID-19 pandemic. 8. Deposits At September 30, 2021 and December 31, 2020, deposits consisted of the following: September 30, 2021 December 31, 2020 (In thousands) Noninterest bearing demand deposit accounts $ 338,705 $ 270,235 Interest bearing accounts: NOW 103,180 101,737 Money market 835,210 669,364 Savings 188,581 158,750 Time certificates of deposit 417,147 627,230 Total interest bearing accounts 1,544,118 1,557,081 Total deposits $ 1,882,823 $ 1,827,316 Maturities of time certificates of deposit as of September 30, 2021 and December 31, 2020 are summarized below: September 30, 2021 December 31, 2020 (In thousands) 2021 $ 109,663 $ 418,117 2022 105,610 50,425 2023 150,119 128,495 2024 51,722 30,160 2025 33 33 Total $ 417,147 $ 627,230 The aggregate amount of individual certificate accounts, including brokered deposits with balances of $250,000 or more, was approximately $ 262.8 million at September 30, 2021 and $ 353.7 million at December 31, 2020. Brokered certificates of deposits totaled $ 200.1 million at September 30, 2021 and $ 238.9 million at December 31, 2020. There were no certificates of deposits from national listing services at September 30, 2021. Certificates of deposits from national listing services totaled $ 18.4 million at December 31, 2020. Brokered money market accounts totaled $ 104.0 million at September 30, 2021 and $ 13.5 million at December 31, 2020. 31 The following table summarizes interest expense on deposits by account type for the three and nine months ended September 30, 2021 and 2020: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In thousands) NOW $ 51 $ 40 $ 148 $ 99 Money market 1,053 859 2,944 3,213 Savings 96 237 313 1,204 Time certificates of deposits 1,187 2,968 4,840 10,107 Total interest expense on deposits $ 2,387 $ 4,104 $ 8,245 $ 14,623 9. Stock-Based Compensation Equity award plans The Company has stock options or unvested restricted stock outstanding under three equity award plans, which are collectively referred to as the “Plan”. The current plan under which any future issuances of equity awards will be made is the 2012 BNC Financial Group, Inc. Stock Plan, or the “2012 Plan,” as amended from time-to-time. All equity awards made under the 2012 Plan are made by means of an award agreement, which contains the specific terms and conditions of the grant. To date, all equity awards have been in the form of stock options or restricted stock. At September 30, 2021, there were 561,901 shares reserved for future issuance under the 2012 Plan. Stock Options : The Company accounts for stock options based on the fair value at the date of grant and records an expense over the vesting period of such awards on a straight line basis. There were no options granted during the nine months ended September 30, 2021. A summary of the status of outstanding stock options for the nine months ended September 30, 2021 is presented below: Nine Months Ended September 30, 2021 Number of Shares Weighted Average Exercise Price Options outstanding at beginning of period 15,180 $ 16.82 Exercised ( 3,500 ) 15.00 Options outstanding at end of period 11,680 17.37 Options exercisable at end of period 11,680 17.37 Intrinsic value is the amount by which the fair value of the underlying stock exceeds the exercise price of an option on the exercise date. The total intrinsic value of share options exercised during the nine months ended September 30, 2021 was $ 19 thousand. The range of exercise prices for the 11,680 options exercisable at September 30, 2021 was $ 15.00 to $ 17.86 per share. The weighted average remaining contractual life for these options was 1.4 years at September 30, 2021. At September 30, 2021, as all awarded options have vested, all of the outstanding options are exercisable, and the aggregate intrinsic value of these options was $ 138 thousand. Restricted Stock : Restricted stock provides grantees with rights to shares of common stock upon completion of a service period. Shares of unvested restricted stock are considered participating securities. Restricted stock awards generally vest over one to five years . 32 The following table presents the activity for restricted stock for the nine months ended September 30, 2021: Nine Months Ended September 30, 2021 Number of Shares Weighted Average Grant Date Fair Value Unvested at beginning of period 163,369 (1) $ 26.22 Granted 51,628 (2) 18.97 Vested ( 36,050 ) 27.39 Forfeited ( 150 ) 33.02 Unvested at end of period 178,797 23.88 (1) Includes 15,099 shares of performance based restricted stock (2) Includes 17,563 shares of performance based restricted stock The total fair value of restricted stock awards vested during the nine months ended September 30, 2021 was $ 0.8 million. The Company's restricted stock expense for the nine months ended September 30, 2021 and September 30, 2020 was $ 1.4 million and $ 1.3 million, respectively. At September 30, 2021, there was $ 3.0 million of unrecognized stock compensation expense for restricted stock, expected to be recognized over a weighted average period of 1.7 years. Performance Based Restricted Stock : The Company has 32,662 shares of performance based restricted stock outstanding as of September 30, 2021 pursuant to the Company’s 2012 Stock Plan. The awards vest over a three to four year service period, provided certain performance metrics are met. The share quantity that ultimately vests can range between 0 % and 200 %, which is dependent on the degree to which the performance metrics are met. The Company records an expense over the vesting period based on (a) the probability that the performance metric will be met and (b) the fair market value of the Company’s stock at the date of the grant. 10. Derivative Instruments The Company manages economic risks, including interest rate, liquidity, and credit risk, by managing the amount, sources, and duration of its funding along with the use of interest rate derivative financial instruments, namely interest rate swaps. The Company does not use derivatives for speculative purposes. As of September 30, 2021, the Company was a party to eight interest rate swaps, designated as hedging instruments, to add stability to interest expense and to manage its exposure to the variability of the future cash flows attributable to the contractually specified interest rates. The notional amount for each swap is $ 25 million and in each case, the Company has entered into pay-fixed interest rate swaps to convert rolling 90 days Federal Home Loan Bank advances or brokered deposits. As of September 30, 2021, the Company entered into four interest rate swaps not designated as hedging instruments, to minimize interest rate risk exposure with loans to customers. The Company accounts for all non-borrower related interest rate swaps as effective cash flow hedges. None of the interest rate swap agreements contain any credit risk related contingent features. A hedging instrument is expected at inception to be highly effective at offsetting changes in the hedged transactions attributable to the changes in the hedged risk. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain loan customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. Interest rate swaps with a positive fair value are recorded as other assets and interest rate swaps with a negative fair value are recorded as other liabilities on the Consolidated Balance Sheets. 33 Information about derivative instruments at September 30, 2021 and December 31, 2020 is as follows: As of September 30, 2021 Derivative Assets Derivative Liabilities Notional Amount Balance Sheet Location Fair Value Notional Amount Balance Sheet Location Fair Value (In thousands) Derivatives designated as hedging instruments: Interest rate swaps $ 50,000 Other assets $ 405 $ 150,000 Accrued expenses and other liabilities $ ( 15,301 ) Derivatives not designated as hedging instruments: Interest rate swaps (1) $ 38,500 Other assets $ 2,512 $ 38,500 Accrued expenses and other liabilities $ ( 2,512 ) (1) Represents interest rate swaps with commercial banking customers, which are offset by derivatives with a third party. Accrued interest payable related to interest rate swaps as of September 30, 2021 totaled $ 0.6 million and is excluded from the fair value presented in the table above. The fair value of interest rate swaps in a net liability position, including accrued interest, totaled $ 15.5 million as of September 30, 2021. As of December 31, 2020 Derivative Assets Derivative Liabilities Notional Amount Balance Sheet Location Fair Value Notional Amount Balance Sheet Location Fair Value (In thousands) Derivatives designated as hedging instruments: Interest rate swaps $ — Other assets $ — $ 225,000 Accrued expenses and other liabilities $ ( 23,567 ) Derivatives not designated as hedging instruments: Interest rate swaps (1) $ 38,500 Other assets $ 4,444 $ 38,500 Accrued expenses and other liabilities $ ( 4,444 ) (1) Represents interest rate swaps with commercial banking customers, which are offset by derivatives with a third party. Accrued interest payable related to interest rate swaps as of December 31, 2020 totaled $ 0.6 million and is excluded from the fair value presented in the table above. The fair value of interest rate swaps in a net liability position, including accrued interest, totaled $ 24.2 million as of December 31, 2020. 34 The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. The Company expects to reclassify $ 3.6 million to interest expense during the next 12 months. The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction. The Company does not offset derivative assets and derivative liabilities for financial statement presentation purposes. Changes in the consolidated statements of comprehensive income (loss) related to interest rate derivatives designated as hedges of cash flows were as follows for the three and nine months ended September 30, 2021 and September 30, 2020: Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2021 2020 2021 2020 Interest rate swaps designated as cash flow hedges: Unrealized gain (loss) recognized in accumulated other comprehensive income before reclassifications $ 515 $ 1,249 $ 5,875 $ ( 17,554 ) Amounts reclassified from accumulated other comprehensive income 921 821 2,796 1,154 Income tax (expense) benefit on items recognized in accumulated other comprehensive income ( 321 ) ( 451 ) ( 1,918 ) 3,654 Other comprehensive income (loss) $ 1,115 $ 1,619 $ 6,753 $ ( 12,746 ) The above unrealized gains and losses are reflective of market interest rates as of the respective balance sheet dates. Generally, a lower interest rate environment will result in a negative impact to comprehensive income whereas a higher interest rate environment will result in a positive impact to comprehensive income. The following tables summarize gross and net information about derivative instruments that are offset in the Consolidated Balance Sheets at September 30, 2021 and December 31, 2020: September 30, 2021 (In thousands) Gross Amounts Not Offset in the Consolidated Balance Sheets Gross Amounts of Recognized Assets (1) Gross Amounts Offset in the Statement of Financial Position Net Amounts of Assets presented in the Statement of Financial Position Financial Instruments Cash Collateral Received Net Amount Derivative Assets $ 2,893 $ — $ 2,893 $ — $ — $ 2,893 (1) Includes accrued interest payable totaling $ 24 thousand. September 30, 2021 (In thousands) Gross Amounts Not Offset in the Consolidated Balance Sheets Gross Amounts of Recognized Liabilities (1) Gross Amounts Offset in the Statement of Financial Position Net Amounts of Liabilities presented in the Statement of Financial Position Financial Instruments Cash Collateral Posted Net Amount Derivative Liabilities $ 18,375 $ — $ 18,375 $ — $ 17,440 $ 935 (1) Includes accrued interest payable totaling $ 562 thousand. 35 December 31, 2020 (In thousands) Gross Amounts Not Offset in the Consolidated Balance Sheets Gross Amounts of Recognized Assets (1) Gross Amounts Offset in the Statement of Financial Position Net Amounts of Assets presented in the Statement of Financial Position Financial Instruments Cash Collateral Received Net Amount Derivative Assets $ 4,484 $ — $ 4,484 $ — $ — $ 4,484 (1) Includes accrued interest receivable totaling $ 40 thousand. December 31, 2020 (In thousands) Gross Amounts Not Offset in the Consolidated Balance Sheets Gross Amounts of Recognized Liabilities (1) Gross Amounts Offset in the Statement of Financial Position Net Amounts of Liabilities presented in the Statement of Financial Position Financial Instruments Cash Collateral Posted Net Amount Derivative Liabilities $ 28,673 $ — $ 28,673 $ — $ 28,205 $ 468 (1) Includes accrued interest payable totaling $ 662 thousand. 11. Fair Value of Financial Instruments GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the Consolidated Balance Sheets, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparisons to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction. The estimated fair value amounts have been measured as of the respective period-ends, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end. The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk. 36 The carrying values, fair values and placement in the fair value hierarchy of the Company's financial instruments at September 30, 2021 and December 31, 2020 were as follows: September 30, 2021 Carrying Value Fair Value Level 1 Level 2 Level 3 (In thousands) Financial Assets: Cash and due from banks $ 169,417 $ 169,417 $ 169,417 $ — $ — Federal funds sold 8,097 8,097 8,097 — — Marketable equity securities 2,185 2,185 2,185 — — Available for sale securities 87,565 87,565 20,568 66,997 — Held to maturity securities 16,107 18,360 — 57 18,303 Loans receivable, net 1,805,217 1,792,793 — — 1,792,793 Accrued interest receivable 6,911 6,911 — 6,911 — FHLB stock 3,632 3,632 — 3,632 — Servicing asset, net of valuation allowance 813 813 — — 813 Derivative asset 2,917 2,917 — 2,917 — Assets held for sale 2,613 2,613 — — 2,613 Financial Liabilities: Noninterest bearing deposits $ 338,705 $ 338,705 $ — $ 338,705 $ — NOW and money market 938,390 938,390 — 938,390 — Savings 188,581 188,581 — 188,581 — Time deposits 417,147 418,703 — — 418,703 Accrued interest payable 933 933 — 933 — Advances from the FHLB 80,000 79,998 — — 79,998 Subordinated debentures 15,500 15,500 — — 15,500 Servicing liability 13 13 — — 13 Derivative liability 17,813 17,813 — 17,813 — 37 December 31, 2020 Carrying Value Fair Value Level 1 Level 2 Level 3 (In thousands) Financial Assets: Cash and due from banks $ 405,340 $ 405,340 $ 405,340 $ — $ — Federal funds sold 4,258 4,258 4,258 — — Marketable equity securities 2,207 2,207 2,207 — — Available for sale securities 88,605 88,605 10,148 78,457 — Held to maturity securities 16,078 20,032 — 70 19,962 Loans receivable, net 1,601,672 1,605,402 — — 1,605,402 Accrued interest receivable 6,579 6,579 — 6,579 — FHLB stock 7,860 7,860 — 7,860 — Servicing asset, net of valuation allowance 628 628 — — 628 Derivative asset 4,444 4,444 — 4,444 — Assets held for sale 2,613 2,613 — — 2,613 Financial Liabilities: Noninterest bearing deposits $ 270,235 $ 270,235 $ — $ 270,235 $ — NOW and money market 771,101 771,101 — 771,101 — Savings 158,750 158,750 — 158,750 — Time deposits 627,230 631,891 — — 631,891 Accrued interest payable 1,750 1,750 — 1,750 — Advances from the FHLB 175,000 174,997 — — 174,997 Subordinated debentures 25,258 25,447 — — 25,447 Servicing liability 21 21 — — 21 Derivative liability 28,011 28,011 — 28,011 — The following methods and assumptions were used by management in estimating the fair value of its financial instruments: Cash and due from banks, federal funds sold, accrued interest receivable and accrued interest payable: The carrying amount is a reasonable estimate of fair value. Marketable equity securities, available for sale securities and held to maturity securities: Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. The majority of the available for sale securities are considered to be Level 2 as other observable inputs are utilized, such as quoted prices for similar securities. Level 1 investment securities include investments in U.S. treasury notes and in marketable equity securities for which a quoted price is readily available in the market. Level 3 held to maturity securities represent private placement municipal housing authority bonds for which no quoted market price is available. The fair value for these securities is estimated using a discounted cash flow model, using discount rates ranging from 3.3 % to 4.7 % as of September 30, 2021 and 2.9 % to 3.3 % as of December 31, 2020. These securities are CRA eligible investments. FHLB stock: The carrying value of FHLB stock approximates fair value based on the most recent redemption provisions of the FHLB. Loans receivable: For variable rate loans which reprice frequently and have no significant change in credit risk, fair values are based on carrying values. The fair value of fixed rate loans are estimated by discounting the future cash flows using the rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value methodology includes prepayment, default and loss severity assumptions applied by the type of loan. The fair value estimate of the loans includes an expected credit loss. 38 Derivative asset (liability): The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company also considers the creditworthiness of each counterparty for assets and the creditworthiness of the Company for liabilities. Assets held for sale: Assets held for sale (excluding loans) consist of real estate properties that are expected to sell within a year. The assets are reported at the lower of the carrying amount or fair value less costs to sell. The fair value represents the price that would be received to sell the asset (the exit price). Servicing asset (liability): Servicing assets and liabilities do not trade in an active, open market with readily observable prices. The Company estimates the fair value of servicing assets and liabilities using discounted cash flow models, incorporating numerous assumptions from the perspective of a market participant, including market discount rates. Deposits: The fair value of demand deposits, regular savings and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit and other time deposits is estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities to a schedule of aggregated expected maturities on such deposits. Borrowings and Subordinated Debentures: The fair value of the Company’s borrowings and subordinated debentures is estimated using a discounted cash flow calculation that applies discount rates currently offered based on similar maturities. The Company also considers its own creditworthiness in determining the fair value of its borrowings and subordinated debt. Contractual cash flows for the subordinated debt are reduced based on the estimated rates of default, the severity of losses to be incurred on a default, and the rates at which the subordinated debt is expected to prepay after the call date. Off-balance-sheet instruments: Loan commitments on which the committed interest rate is less than the current market rate are insignificant at September 30, 2021 and December 31, 2020. 12. Fair Value Measurements The Company is required to account for certain assets at fair value on a recurring or non-recurring basis. The Company determines fair value in accordance with GAAP, which defines fair value and establishes a framework for measuring fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values: Level 1 — Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2 — Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 — Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. Valuation techniques based on unobservable inputs are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows and the selection of discount rates that may appropriately reflect market and credit risks. Changes in these judgments often have a material impact on the fair value estimates. In addition, since these estimates are as of a specific point in time they are susceptible to material near-term changes. 39 Financial instruments measured at fair value on a recurring basis The following table details the financial instruments carried at fair value on a recurring basis at September 30, 2021 and December 31, 2020, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value. The Company had no transfers into or out of Levels 1, 2 or 3 during the nine months ended September 30, 2021 and for the year ended December 31, 2020. Fair Value (In thousands) Level 1 Level 2 Level 3 September 30, 2021: Marketable equity securities $ 2,185 $ — $ — Available for sale investment securities: U.S. Government and agency obligations 20,568 52,925 — Corporate bonds — 14,072 — Derivative asset — 2,917 — Derivative liability — 17,813 — December 31, 2020: Marketable equity securities $ 2,207 $ — $ — Available for sale investment securities: U.S. Government and agency obligations 10,148 66,730 — Corporate bonds — 11,727 — Derivative asset — 4,444 — Derivative liability — 28,011 — Marketable equity securities and available for sale investment securities: The fair value of the Company’s investment securities is estimated by using pricing models or quoted prices of securities with similar characteristics (i.e., matrix pricing) and is classified within Level 1 or Level 2 of the valuation hierarchy. The pricing is primarily sourced from third-party pricing services overseen by management. Derivative assets and liabilities: The Company’s derivative assets and liabilities consist of transactions as part of management’s strategy to manage interest rate risk. The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company has determined that the majority of the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy. Financial instruments measured at fair value on a nonrecurring basis Certain assets and liabilities are measured at fair value on a non-recurring basis in accordance with GAAP. These include assets that are measured at the lower-of-cost-or-market that were recognized at fair value below cost at the end of the period as well as assets that are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. 40 The following table details the financial instruments measured at fair value on a nonrecurring basis at September 30, 2021 and December 31, 2020, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value: Fair Value (In thousands) Level 1 Level 2 Level 3 September 30, 2021: Impaired loans $ — $ — $ 47,162 Servicing asset, net — — 800 December 31, 2020: Impaired loans $ — $ — $ 42,661 Servicing asset, net — — 607 Assets held for sale — — 2,613 The following table presents information about quantitative inputs and assumptions for Level 3 financial instruments carried at fair value on a nonrecurring basis at September 30, 2021 and December 31, 2020: Fair Value Valuation Methodology Unobservable Input Range (Dollars in thousands) September 30, 2021: Impaired loans $ 21,602 Appraisals Discount to appraised value 8.00 % 25,560 Discounted cash flows Discount rate 3.00 - 6.75 % $ 47,162 Servicing asset, net $ 800 Discounted cash flows Discount rate 10.00 % (1) Prepayment rate 3.00 - 17.00 % December 31, 2020: Impaired loans $ 20,703 Appraisals Discount to appraised value 8.00 - 33.00 % 21,958 Discounted cash flows Discount rate 3.00 - 12.00 % $ 42,661 Servicing asset, net $ 607 Discounted cash flows Discount rate 10.00 % (2) Prepayment rate 3.00 - 16.00 % Assets held for sale $ 2,613 Sale & income approach Adjustment to valuation and cost to sell N/A (1) Servicing liabilities totaling $ 13 thousand were valued using a discount rate of 0.4 %. (2) Servicing liabilities totaling $ 21 thousand were valued using a discount rate of 0.2 %. Impaired loans : Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral-dependent loans calculated in accordance with ASC 310-10 when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. Collateral is typically valued using appraisals 41 or other indications of value based on recent comparable sales of similar properties or other assumptions. Estimates of fair value based on collateral are generally based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3. For those loans where the primary source of repayment is cash flow from operations, adjustments include impairment amounts calculated based on the perceived collectability of interest payments on the basis of a discounted cash flow analysis utilizing a discount rate equivalent to the original note rate. Servicing assets and liabilities: When loans are sold, on a servicing retained basis, servicing rights are initially recorded at fair value. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized. The fair value of servicing assets and liabilities are not measured on an ongoing basis but are subject to fair value adjustments when and if the assets or liabilities are deemed to be impaired. Assets held for sale: Assets held for sale (excluding loans) consist of real estate properties that are expected to sell within a year. The assets are reported at the lower of the carrying amount or fair value less costs to sell. The fair value represents the price that would be received to sell the asset (the exit price). 13. Subordinated debentures On August 19, 2015, the Company completed a private placement of $ 25.5 million in aggregate principal amount of fixed rate subordinated notes (the “2015 Notes”) to certain institutional investors. The 2015 Notes are non-callable for five years , have a stated maturity of August 15, 2025, and bear interest at a quarterly pay fixed rate of 5.75 % per annum to the maturity date. The 2015 Notes became callable, in part or in whole, beginning August 2020. On May 15, 2021, the Company repaid $ 10.0 million of the 2015 Notes. The 2015 Notes have been structured to qualify for the Company as Tier 2 capital under regulatory guidelines. The net proceeds were used for general corporate purposes, which included maintaining liquidity at the holding company, providing equity capital to the Bank to fund balance sheet growth and the Company's working capital needs. In the third quarter of 2021, the 2015 Notes investment grade rating of BBB- was reaffirmed by Kroll Bond Rating Agency. The Company recognized $ 0.2 million and $ 0.4 million in interest expense related to its subordinated debt for the three month periods ended September 30, 2021 and 2020, respectively. The Company recognized $ 0.9 million and $ 1.1 million in interest expense related to its subordinated debt for the nine month periods ended September 30, 2021 and 2020, respectively. 14. Subsequent Events On October 14, 2021, the Company entered into a Subordinated Note Purchase Agreement with an institutional accredited investor, pursuant to which the Company issued and sold 3.25 % fixed-to-floating rate subordinated notes due 2031 (the “2021 Notes”) in the principal amount of $ 35.0 million. The Company intends to use the net proceeds from the sale of the 2021 Notes for general corporate purposes, including, but not limited to, the repayment of $ 15.5 million of outstanding subordinated notes. On October 14, 2021, the Company issued a notice of redemption of the outstanding 2015 Notes. The notice calls for the redemption of the remaining $ 15.5 million aggregate principal amount of the 2015 Notes on November 15, 2021. The redemption price for the 2015 Notes is 100 % of the principal amount redeemed, plus accrued and unpaid interest to, but not including, the redemption date. On October 27, 2021, the Company’s Board of Directors declared an $ 0.18 per share cash dividend, payable on November 22, 2021 to shareholders of record on November 12, 2021. In addition, the Company's Board of Directors authorized the repurchase of an additional 200,000 shares under its existing share repurchase program. 42