What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-03-08 compared with 2021-03-10 · 117 added, 186 removed, 657 unchanged (32% of the section changed)

10 unchanged sentences

The Bank is a Connecticut state chartered commercial bank, founded in 2002, whose deposits are insured under the Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation (“FDIC”).

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

The 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.

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

5 unchanged sentences

Executive Overview

We are focused on being the “Hometown” bank and the banking provider of choice in our attractive market area, and to serve as a locally based alternative to our larger competitors.

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

We aim to do this through:

4 unchanged sentences

Impact of COVID-19

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

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

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

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

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

The 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.

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

4 unchanged sentences

At or For the Years Ended December 31,

2020 2019 2018

(Dollars in thousands, except per share data)

16 unchanged sentences

At or For the Years Ended December 31,

2020 2019 2018

Other financial measures and ratios:

87 unchanged sentences

2021 Earnings Overview

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

Our net income for the year ended December 31, 2021 was $26.6 million, an increase of $20.7 million, or 350.3%, compared to the year ended December 31, 2020.

Diluted earnings per share was $3.36 for the year ended December 31, 2021, compared to diluted earnings per share of $0.75 for the year ended December 31, 2020.

Our returns on average shareholders' equity and average assets for the year ended December 31, 2021, were 13.86% and 1.17%, respectively, compared to 3.35% and 0.28%, respectively for the year ended December 31, 2020.

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

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

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

The increase in net income for 2021 compared to 2020 was primarily impacted by lower interest expense on deposits, an increase in interest and fees on loans due to loan growth, the resumption of loan sales, a decrease in noninterest expense, and a

decrease in the provision for loan losses resulting from lower loan loss reserves in 2021 when compared to 2020, which saw a large increase in reserves due to the COVID-19 pandemic.

Net interest income for the year ended December 31, 2021 was $67.9 million, an increase of $13.1 million compared to the year ended December 31, 2020.

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

2019 Earnings Overview

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

Our net interest margin increased 40 basis points to 3.17% for the year ended December 31, 2021 compared to the year ended December 31, 2020 reflecting lower interest expense from a decrease in rates on interest bearing deposits, as well as growing noninterest bearing deposits as a percentage of total deposits.

Results of Operations

7 unchanged sentences

Premium amortization and discount accretion are included in the respective interest income and interest expense amounts.

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

FTE net interest income for the years ended December 31, 2021 and 2020 was $68.1 million and $55.0 million, respectively.

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

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

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

Net interest income increased primarily due to lower rates on interest bearing deposits, and to a lesser extent, an increase in loan volume.

FTE basis interest income for the year ended December 31, 2021 increased $3.9 million, or 5.0%, to $81.6 million compared to FTE basis interest income for the year ended December 31, 2020 due primarily to an increase in commercial real estate loans and commercial business loans.

Average interest earning assets were $2.1 billion for the year ended December 31, 2021, increasing by $159.4 million, or 8.0%, from the year ended December 31, 2020.

The average balance of total loans increased $125.4 million, or 7.8%.

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

The total average balance of securities for the year ended December 31, 2021 increased by $4.7 million, or 4.7%, from the year ended December 31, 2020.

The total yield in earnings assets decreased to 3.75% at December 31, 2021, compared to 3.85% at December 31, 2020.

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

The decrease in yield was primarily driven by marginally lower yields on loans, as well as lower yields on our cash and investment balances as a result of the overall low rate environment for 2021.

Interest expense for the year ended December 31, 2021 decreased by $9.2 million, or 40.4%, compared to interest expense for 2020 due to a decrease in rates on interest bearing deposits.

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

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

Average interest bearing liabilities for the year ended December 31, 2021 increased by $34.4 million, or 2.1%, from the year ended December 31, 2020, primarily due to an increase in interest bearing liabilities, partially offset by a reduction in wholesale funding.

Distribution of Assets, Liabilities and Stockholders’ Equity;

2 unchanged sentences

Years Ended December 31,

2020 2019 2018

Balance Interest Yield/

(Dollars in thousands)

5 unchanged sentences

Construction 97,163 3,780 3.84 97,230 4,262 4.31

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

Commercial business 313,422 14,589 4.59 295,662 13,530 4.50

25 unchanged sentences

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

(2) Includes commercial and residential real estate construction loans.

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

(2) The adjustment for securities and loans taxable equivalency was $201 thousand and $212 thousand, respectively, for the years ended December 31, 2021 and 2020.

Tax exempt income was converted to a fully taxable equivalent basis at a 20 percent tax rate for 2021 and 2020.

9 unchanged sentences

December 31, 2021 vs 2020

Increase (Decrease) Year Ended

December 31, 2019 vs 2018

Increase (Decrease)

Volume Rate Total Volume Rate Total

Volume Rate Total

(In thousands)

22 unchanged sentences

The provision for loan losses is charged against earnings in order to maintain our allowance for loan losses and reflects management’s best estimate of probable losses inherent in our loan portfolio at the balance sheet date.

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

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

The credit for loan losses for the year ended December 31, 2021 was $0.1 million compared to a $7.6 million provision for loan losses for the year ended December 31, 2020.

The decrease in the provision for loan losses was primarily due to improving economic trends for the year ended December 31, 2021 and lower COVID-19 related reserves when compared to 2020.

Noninterest Income

1 unchanged sentence

The following table compares noninterest income for the years ended December 31, 2021 and 2020.

December 31, 2020/2019

Change 2019/2018

2021 2020 $ %

(Dollars in thousands)

Gains and fees from sales of loans $ 2,692 $ 43 $ 2,649 6,160 %

Bank owned life insurance 1,023 967 56 6

Service charges and fees 872 788 84 11

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

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

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

Gain on sale of other real estate owned, net — 19 (19) (100)

Other 1,070 1,067 3 —

Total noninterest income $ 5,657 $ 2,884 $ 2,773 96 %

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

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

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

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

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

Noninterest income increased by $2.8 million to $5.7 million for the year ended December 31, 2021, compared to the year ended December 31, 2020.

The increase in noninterest income was primarily a result of resumed loan sales, totaling $2.7 million for the year ended December 31, 2021.

The increase for the year was also impacted by a one-time federal payroll tax credit for COVID-19 of $0.9 million, partially offset by a $0.2 million loss on the sale of the Company's former headquarters building.

In addition, in 2020 the Company recognized a $0.4 million benefit of nonrecurring swap fees related to interest rate swaps with commercial banking customers.

Noninterest Expense

The following table compares noninterest expense for the years ended December 31, 2021 and 2020.

December 31, 2020/2019

Change 2019/2018

2021 2020 $ %

9 unchanged sentences

Total noninterest expense $ 39,739 $ 42,813 $ (3,074) (7) %

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Noninterest expense decreased by $3.1 million, or 7%, to $39.7 million for the year ended December 31, 2021 compared to the year ended December 31, 2020.

The decrease in noninterest expense was primarily driven by a decrease in salaries and employee benefits expense and data processing expense.

Salaries and employee benefits totaled $18.3 million for the year ended December 31, 2021, a decrease of $3.0 million when compared to the same period in 2020.

The decrease in salaries and employee benefits was primarily driven by a decrease in full time equivalent employees as a direct result of the Voluntary Early Retirement Incentive Plan offered to eligible employees and other employee actions taken during the fourth quarter of 2020.

Average full time equivalent employees totaled 126 for the year ended December 31, 2021 compared to 146 for the same period in 2020.

In addition, salaries and employee benefits expense also benefited by one-time deferrals of $0.9 million for the year ended December 31, 2021 related to costs

associated with the implementation of a new online banking and other systems.

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

Data processing expense totaled $2.4 million for the year ended December 31, 2021, a decrease of $0.8 million when compared to the same period in 2020.

The decrease in data processing expense was primarily due to a $1.1 million one-time charge related to early termination fees payable to a legacy technology vendor recognized during the fourth quarter of 2020.

Income tax expense for the years ended December 31, 2021 and 2020 totaled $7.3 million and $1.4 million, respectively.

The effective tax rates for the years ended December 31, 2021 and 2020, were 21.5% and 19.1%, respectively.

Our net deferred tax asset at December 31, 2021 was $7.6 million, compared to $11.3 million at December 31, 2020.

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

The decrease in the deferred tax asset at December 31, 2021 when compared to the same period in 2020 was primarily a result of fair value marks related to hedge positions involving interest rate swaps and a decrease in the allowance for loan losses.

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

5 unchanged sentences

Assets totaled $2.5 billion at December 31, 2021, compared to assets of $2.3 billion at December 31, 2020.

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

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

Gross loans totaled $1.9 billion at December 31, 2021, an increase of $269.3 million compared to December 31, 2020.

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

Excluding Paycheck Protection Program ("PPP") loans, gross loans increased by $303.9 million at December 31, 2021 when compared to December 31, 2020.

Deposits totaled $2.1 billion at December 31, 2021, compared to deposits of $1.8 billion at December 31, 2020.

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

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

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

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

The increase in deposits was a result of successful commercial core deposit gathering efforts.

Shareholders’ equity totaled $202.0 million as of December 31, 2021, an increase of $25.4 million compared to December 31, 2020, primarily a result of (i) net income of $26.6 million for the year ended December 31, 2021 and (ii) a $7.0 million favorable impact to accumulated other comprehensive income driven by fair value marks related to hedge positions involving interest rate swaps.

The Company's interest rate swaps are used to hedge interest rate risk.

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

The increase in Shareholders’ equity was partially offset by dividends paid of $5.0 million and common stock repurchases of $5.1 million.

Loan Portfolio

23 unchanged sentences

Construction.

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

Construction loans were $98.3 million at December 31 2021, up $11.3 million from December 31, 2020.

Construction loans totaled $87.0 million at December 31, 2020.

2 unchanged sentences

Commercial business loans were $351.0 million and represented 19% of our total loan portfolio at December 31, 2021, a net increase of $74.4 million, or 26.9%, from December 31, 2020.

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

The increase in commercial business loans is a direct result of the Bank’s commitment in growing this portfolio.

The December 31, 2021 and December 31, 2020 balance includes $0.2 million and $34.8 million of PPP loans made under the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), respectively.

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

23 unchanged sentences

We actively manage asset quality through our underwriting practices and collection operations.

Our Board of Directors monitors credit risk management through two committees, the Directors' Loan Committee ("DLC") and the Audit Committee.

The DLC has primary oversight responsibility for the credit granting function including approval authority for credit granting policies, review of management’s credit granting activities and approval of large exposure credit requests.

The Audit Committee oversees management’s procedures to monitor the credit quality of our loan portfolio and the loan review program.

These committees report the results of their respective oversight functions to our Board of Directors.

In addition, our Board of Directors receives information concerning asset quality measurements and trends on a periodic basis.

While we continue to adhere to prudent underwriting standards, our loan portfolio is not immune to potential negative consequences as a result of general economic weakness, such as a prolonged downturn in the housing market on a regional or national scale.

Our Board of Directors monitors credit risk management.

The Directors Loan Committee ("DLC") has primary oversight responsibility for the credit-

granting function including approval authority for credit-granting policies, review of management’s credit-granting activities and approval of large exposure credit requests, as well as loan review and problem loan management and resolution.

The committee reports the results of its respective oversight functions to our Board of Directors.

In addition, our Board of Directors receives information concerning asset quality measurements and trends on a monthly basis.

Decreases in real estate values could adversely affect the value of property used as collateral for loans.

26 unchanged sentences

At December 31,

2020 2019 2018 2017 2016

(Dollars in thousands)

5 unchanged sentences

Construction 8,997 8,997

Consumer — — — — 341

Total nonaccrual loans 16,587 33,416

3 unchanged sentences

Nonperforming loans to total loans 0.88 % 2.06 %

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

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

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

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

Total nonaccrual loans were $16.6 million as of December 31, 2021.

Nonperforming assets as a percentage of total assets was 0.68% at December 31, 2021, down from 1.48% at December 31, 2020.

The allowance for loan losses at December 31, 2021 was $16.9 million, representing 0.89% of total loans.

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

The $4.1 million decrease in the allowance for loan losses at December 31, 2021 when compared to December 31, 2020 was primarily due to improving economic trends and lower COVID-19 related reserves when compared to 2020.

Nonaccrual Loans .

8 unchanged sentences

The Company attempts to contact the borrower by phone if the delinquency is not corrected promptly after the notice has been sent.

When the loan is 30 days past due, the Company mails the borrower a letter reminding the borrower of the delinquency, and attempts to contact

the borrower personally to determine the reason for the delinquency and ensure the borrower understands the terms of the loan.

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.

4 unchanged sentences

Loans that are granted payment deferrals under the CARES Act are not required to be reported as past due or placed on non-accrual status if the criteria under section 4013 of the CARES Act are met.

As of December 31, 2021, no loans remained on active deferral under the CARES Act.

The following table presents past due loans as of December 31, 2021 and 2020:

6 unchanged sentences

Commercial business 1,995 1,483 1,469 4,947

Consumer — 3 — 3

Total loans $ 5,054 $ 11,986 $ 15,588 $ 32,628

5 unchanged sentences

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

Total past due loans totaled $32.6 million and represented 1.72% of total loans as of December 31, 2021, increasing $17.5 million from December 31, 2020.

The increase in past due loans primarily relates to one commercial real estate loan totaling $10.5 million for which a loan extension is currently in progress.

In addition, a total of $4.9 million of past due loans as of December 31, 2021 have since been brought current as of January 31, 2022.

Troubled Debt Restructurings (TDR) .

4 unchanged sentences

All short term loan modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any request for relief are not considered TDRs.

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

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

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

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

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

1 unchanged sentence

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

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

At December 31, 2021 and December 31, 2020 there were five nonaccrual loans identified as TDRs totaling $2.0 million and three nonaccrual loans identified as TDRs totaling $1.4 million, respectively.

The following table presents information on troubled debt restructured loans:

At December 31,

2020 2019 2018 2017 2016

(In thousands)

6 unchanged sentences

Residential real estate $ 1,502 $ 872

Commercial real estate — — 334 334 —

Commercial business 465 571

22 unchanged sentences

At December 31,

2020 2019 2018 2017 2016

(Dollars in thousands)

8 unchanged sentences

Commercial real estate — 15

Consumer 3 32 7 3 10

Commercial Business 30 —

Consumer 13 3

Total recoveries 43 18

Net charge-offs (4,050) (105)

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

(Credit) provision charged to earnings (57) 7,605

Balance at end of period $ 16,902 $ 21,009

Net charge-offs (recoveries) to average loans 0.01 % 0.15 % 0.44 % 0.03 % 0.01 %

Net charge-offs to average loans 0.23 % 0.01 %

Allowance for loan losses to total loans 0.89 % 1.29 %

At December 31, 2021, our allowance for loan losses was $16.9 million and represented 0.89% of total loans, compared to $21.0 million and 1.29% of total loans at December 31, 2020.

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

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

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

The decrease in the ratio of allowance for loan losses to total loans is driven by a reduction in loan loss reserves as a result of improving economic trends and charge-offs taken against previously established loan loss reserves.

For the year ended December 31, 2021, the credit for loan losses totaled $0.1 million.

For the year ended December 31, 2020 the provision for loan losses totaled $7.6 million.

Net charge-offs for the year ended December 31, 2021 were $4.1 million and represented 0.23% of average loans.

5 unchanged sentences

At December 31,

2020 2019 2018 2017 2016

Amount Percent of

Portfolio Amount Percent of

(Dollars in thousands)

17 unchanged sentences

At December 31,

2020 2019 2018

Value Amortized

(In thousands)

2 unchanged sentences

Government and agency obligations 73,571 75,189 73,574 76,878

State agency and municipal obligations — — — — 4,023 4,007

Corporate bonds 14,500 15,009 11,500 11,727

2 unchanged sentences

State agency and municipal obligations $ 15,998 $ 18,393 $ 16,018 $ 19,962

Corporate bonds — — — — 1,000 1,000

Government mortgage-backed securities 45 52 60 70

1 unchanged sentence

At December 31, 2021, the carrying value of our investment securities portfolio totaled $108.4 million and represented 4% of total assets, compared to $106.9 million and 5% of total assets at December 31, 2020.

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

The increase of $1.5 million primarily reflects purchases of corporate bonds.

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

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

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

The net unrealized gain position on our investment portfolio at December 31, 2021 was $4.5 million and included gross unrealized losses of $0.5 million.

The net unrealized gain position on our investment portfolio at December 31, 2020 was

$7.5 million and did not include any gross unrealized losses.

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

25 unchanged sentences

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

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

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

20 unchanged sentences

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

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

With the exception of reciprocal deposits, CDARS and ICS One-Way buy transactions are considered to be brokered deposits for bank regulatory purposes.

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

We subscribe to a listing service, accessible to financial institutions, in which we may advertise our time deposit rates in exchange for a set subscription fee.

We subscribe to a listing service, accessible to financial institutions, in which we may advertise our time deposit rates.

Interested financial institutions then contact us directly to acquire a time certificate of deposit.

11 unchanged sentences

Total deposits $ 2,123,998 100.00 % 0.65 % $ 1,827,316 100.00 % 1.23 %

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

Total deposits were $2.1 billion at December 31, 2021, an increase of $296.7 million, or 16%, from December 31, 2020, reflecting successful commercial core deposit gathering efforts.

Brokered certificates of deposits ("Brokered CDs") totaled $249.4 million and $238.9 million at December 31, 2021 and December 31, 2020, respectively.

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

There were no certificates of deposits from national listing services at December 31, 2021.

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

Brokered money market accounts totaled $104.0 million and $13.5 million at December 31, 2021 and 2020, respectively.

Brokered deposits represent brokered certificates of deposit, brokered money

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

Brokered deposits are utilized as an additional source of funding.

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

The increase in these brokered deposits is a result of replacing FHLB advances with more cost effective brokered deposits.

At December 31, 2021 and 2020, time deposits, including CDARS and brokered certificates of deposit, with a denomination of $100 thousand or more totaled $391.2 million and $519.8 million, respectively, maturing during the periods indicated in the table below:

12 unchanged sentences

Total FHLB advances were $50.0 million at December 31, 2021 compared to $175.0 million at December 31, 2020.

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

The decrease of $125.0 million primarily reflects the substitution of lower cost brokered deposits in lieu of FHLB advances and a permanent reduction in wholesale funding.

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

1 unchanged sentence

Year Ended December 31,

2020 2019 2018

(Dollars in thousands)

6 unchanged sentences

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 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 were non-callable for five years, had a stated maturity of August 15, 2025, and bore 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 and on November 15, 2021, the Company repaid the remaining $15.5 million of the 2015 Notes.

On October 14, 2021, the Company completed a private placement of a $35.0 million fixed-to-floating rate subordinated note (the “2021 Note”) to an institutional accredited investor.

The Company used the net proceeds to repay the 2015 Notes and intends to use the remaining proceeds for general corporate purposes.

The 2021 Note bears interest at a fixed rate of 3.25% per year until October 14, 2026.

Thereafter, the interest rate will reset quarterly at a variable rate equal to the then current three-month term SOFR plus 233 basis points.

The 2021 Note has a stated maturity of October 15, 2031 and is non-callable for five years.

Beginning October 15, 2026, the Company may redeem the 2021 Note, in whole or in part, at its option.

The 2021 Note is not redeemable at the option of the holder.

Derivative Instruments

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

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

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

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

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

3 unchanged sentences

Information about derivative instruments at December 31, 2021 and 2020 was as follows:

December 31, 2020:

Original Notional

Amount Original

Maturity Maturity Date Received Paid Fair Value

(Dollars in thousands)

As of December 31, 2021

Derivative Assets Derivative Liabilities

Original Notional Amount Balance Sheet Location Fair Value Original Notional Amount Balance Sheet Location Fair Value

(In thousands)

Derivatives designated as hedging instruments:

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

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

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

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

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

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

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

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

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

$ 225,000 $ (23,567)

Interest rate swaps $ 50,000 Other assets $ 1,043 $ 150,000 Accrued expenses and other liabilities $ (14,195)

Derivatives not designated as hedging instruments:

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

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

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

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

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

Interest rate swaps (1)

$ 38,500 Other assets $ 2,585 $ 38,500 Accrued expenses and other liabilities $ (2,585)

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

December 31, 2019:

Original Notional

Amount Original

Maturity Maturity Date Received Paid Fair Value

(Dollars in thousands)

As of December 31, 2020

Derivative Assets Derivative Liabilities

Original Notional Amount Balance Sheet Location Fair Value Original Notional Amount Balance Sheet Location Fair Value

(In thousands)

Derivatives designated as hedging instruments:

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

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

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

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

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

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

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

Forward-starting interest rate swap (1)

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

Forward-starting interest rate swap (1)

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

$ 225,000 $ (10,691)

Interest rate swaps $ — Other assets $ — $ 225,000 Accrued expenses and other liabilities $ (23,567)

Derivatives not designated as hedging instruments:

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

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

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

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

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

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.

Liquidity and Capital Resources

2 unchanged sentences

Our primary source of liquidity is deposits.

While our generally preferred funding strategy is to attract and retain low cost deposits, our ability to do so is affected by competitive interest rates and terms in the marketplace.

While our generally preferred funding strategy is to attract and

retain low cost deposits, our ability to do so is affected by competitive interest rates and terms in the marketplace.

Other sources of funding include discretionary use of purchased liabilities (e.g., FHLB term advances and other borrowings), cash flows from our investment securities portfolios, loan sales, loan repayments and earnings.

5 unchanged sentences

We employ a stress testing methodology to estimate needs for contingent funding that could result from unexpected outflows of funds in excess of “business as usual” cash flows.

The Bank has established unsecured borrowing capacity with the Atlantic Community Bankers Bank (ACBB) (formerly Bankers’ Bank

Northeast), Zion’s Bank and Texas Capital Bank and also maintains additional collateralized borrowing capacity with the FHLB in excess of levels used in the ordinary course of business.

The Bank has established unsecured borrowing capacity with the Atlantic Community Bankers Bank (ACBB) (formerly Bankers’ Bank Northeast), Zion’s Bank and Texas Capital Bank and also maintains additional collateralized borrowing capacity with the FHLB in excess of levels used in the ordinary course of business.

Our sources of liquidity include cash, unpledged investment securities, borrowings from the FHLB, lines of credit from ACBB, Zion's Bank and Texas Capital Bank, the brokered deposit market and national CD listing services.

Capital Resources

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

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

The Company's interest rate swaps are used to hedge interest rate risk.

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

The increase in Shareholders’ equity was partially offset by dividends paid of $5.0 million and common stock repurchases of $5.1 million.

As of December 31, 2021, the tangible common equity ratio and tangible book value per share were 8.13% and $26.19, respectively.

3 unchanged sentences

At December 31, 2021, the Bank’s ratio of total common equity tier 1 capital to risk-weighted assets was 11.18%, total capital to risk-weighted assets was 12.00%, Tier 1 capital to risk-weighted assets was 11.18% and Tier 1 capital to average assets was 9.94%.

As of January 1, 2015, the Parent Corporation and the Bank became subject to new capital rules set forth by the Federal Reserve, the FDIC and the other federal and state bank regulatory agencies.

The capital rules revise the banking agencies’ leverage and risk-based capital requirements and the method for calculating risk weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act (the Basel III Capital Rules).

The Basel III Capital Rules establish a minimum Common Equity Tier 1 capital requirement of 4.5% of risk-weighted assets;

set the minimum leverage ratio at 4.0% of total assets;

increased the minimum Tier 1 capital to risk-weighted assets requirement from 4.0% to 6.0%;

and retained the minimum total capital to risk weighted assets requirement at 8.0%.

A “well capitalized” institution must generally maintain capital ratios 100 to 200 basis points higher than the minimum guidelines.

The Basel III Capital Rules also change the risk weights assigned to certain assets.

The Basel III Capital Rules assigned a higher risk weight (150%) to loans that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property.

The Basel III Capital Rules also alter the risk weighting for other assets, including marketable equity securities that are risk weighted generally at 300%.

The Basel III Capital Rules require certain components of accumulated other comprehensive income (loss) to be included for purposes of calculating regulatory capital requirements unless a one-time opt-out is exercised.

The Bank did exercise its opt-out option and will excludes the unrealized gain (loss) on investment securities component of accumulated other comprehensive income (loss) from regulatory capital.

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

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

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

Under the current guidelines, banking organizations must have a minimum total risk-based capital ratio of 8.0%, a minimum Tier 1 risk-based capital ratio of 6.0%, a minimum common equity Tier 1 risk-based capital ratio of 4.5%, and a minimum leverage ratio of 4.0% in order to be "adequately capitalized." In addition to these requirements, banking organizations must maintain a capital conservation buffer consisting of common Tier 1 equity in an amount above the minimum risk-based capital requirements for “adequately capitalized” institutions equal to 2.5% of total risk-weighted assets, resulting in a requirement for the Company and the Bank to effectively maintain common equity Tier 1, Tier 1 and total capital ratios of 7.0%, 8.5% and 10.5%, respectively.

The Company and the Bank must maintain the capital conservation buffer to avoid restrictions on the ability to pay dividends, pay discretionary bonuses, or to engage in share repurchases.

Contractual Obligations

44 unchanged sentences

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

What changed 10-K

Item 7. Management’s Discussion and Analysis