What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-10 compared with 2022-11-07 · 147 added, 217 removed, 277 unchanged (57% of the section changed)

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

Through our wholly owned subsidiary, Bankwell Bank, or the Bank, we serve small and medium-sized businesses and retail customers.

We have a history of building long-term customer relationships and attracting new customers through what we believe is our strong customer service and our ability to deliver a diverse product offering.

Through our wholly owned subsidiary, Bankwell Bank, or the Bank, we serve small and medium-sized businesses and retail clients.

We have a history of building long-term client relationships and attracting new clients through what we believe is out superior service and our ability to deliver a diverse product offering.

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

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Our primary source of funding for our loans is deposits.

Our largest expenses are interest on deposits and salaries and related employee benefits.

We measure our performance primarily through our net interest margin, efficiency ratio, ratio of allowance for loan losses to total loans, return on average assets and return on average equity, among other metrics, while maintaining appropriate regulatory leverage and risk-based capital ratios.

Our largest expenses are interest on these deposits and salaries and related employee benefits.

We measure our performance primarily through our net interest margin, efficiency ratio, ratio of ACL-Loans to total loans, return on average assets and return on average equity, among other metrics, while maintaining appropriate regulatory leverage and risk-based capital ratios.

Executive Overview

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We aim to do this through:

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

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

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

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Actual results could differ from our current estimates, as a result of changing conditions and future events.

We believe that accounting estimates related to the measurement of the allowance for loan losses, the valuation of derivative instruments, investment securities and deferred income taxes, and the evaluation of investment securities for other than temporary impairment are particularly critical and susceptible to significant near-term change.

We believe that accounting estimates related to the measurement of the ACL-Loans, the valuation of derivative instruments, investment securities and deferred income taxes, and the evaluation of investment securities for other than temporary impairment are particularly critical and susceptible to significant near-term change.

Earnings and Performance Overview

For the three months ended September 30, 2022, net interest income was $24.6 million, an increase of $6.9 million or 38.8% when compared to the same period in 2021.

For the nine months ended September 30, 2022, net interest income was $67.9 million, an increase of $19.0 million or 38.8% when compared to the same period in 2021.

The increase in net interest income for the three and nine months ended September 30, 2022 was primarily due to an increase in interest and fees on loans due to loan growth and higher overall loan yields.

The increase in loan yields was aided by elevated loan prepayment fees, which totaled $1.3 million for the three months ended September 30, 2022, compared to $0.1 million for the three months ended September 30, 2021.

The increase in net interest income for the three months ended September 30, 2022 was partially offset by an increase in interest expense on deposits, resulting from an increase in rates necessary to remain competitive in the current economic environment.

Noninterest income decreased $1.0 million to $0.4 million for the three months ended September 30, 2022 compared to the same period in 2021.

Noninterest income decreased $2.3 million to $2.5 million for the nine months ended September 30, 2022 compared to the same period in 2021.

The decrease in noninterest income was driven by a reduction in loan sales for the three and nine months ended September 30, 2022 when compared to the same periods in 2021.

Loan sales decreased $0.9 million and $1.0 million for the three and nine months ended September 30, 2022, respectively.

The Company intends to resume loan sales in 2023.

In addition, noninterest income declined due to the absence of rental income recognized during the three and nine months ended September 30, 2021, as a result of the disposition of the Company's former headquarters building.

Noninterest income also declined for the nine months ended September 30, 2022 due to a one-time federal payroll tax credit for COVID-19 of $0.9 million recognized in the three months ended March 31, 2021.

Net income available to common shareholders was $9.2 million, or $1.18 per diluted share, and $6.9 million, or $0.87 per diluted share, for the three months ended September 30, 2022 and 2021, respectively.

Net income available to common shareholders was $29.4 million, or $3.75 per diluted share, and $18.8 million, or $2.37 per diluted share, for the nine months ended September 30, 2022 and 2021, respectively.

The increase in net income was primarily impacted by the aforementioned increases in net interest income, partially offset by an increase in noninterest expense and the provision for loan losses primarily driven by loan growth for the three and nine months ended September 30, 2022.

Returns on average shareholders' equity and average assets for the three months ended September 30, 2022 were 15.73% and 1.47%, respectively, compared to 14.09% and 1.22%, respectively, for the three months ended September 30, 2021.

Returns on average shareholders' equity and average assets for the nine months ended September 30, 2022 were 17.94% and 1.59%, respectively, compared to 13.29% and 1.12%, respectively, for the nine months ended September 30, 2021.

For the three months ended March 31, 2023, net interest income was $25.5 million, an increase of $6.0 million or 30.9% when compared to the same period in 2022.

The increase in net interest income for the three months ended March 31, 2023 was primarily due to an increase in interest and fees on loans due to loan growth and higher overall loan yields.

Loan interest income totaled $39.7 million for the three months ended March 31, 2023, compared to $21.4 million for the three months ended March 31, 2022.

The increase in interest income for the three months ended March 31, 2023 was partially offset by an increase in interest expense on deposits, resulting from an increase in rates necessary to remain competitive in the current economic environment.

Noninterest income increased $0.6 million to $1.5 million for the three months ended March 31, 2023 compared to the same period in 2022.

The increase in noninterest income was driven by SBA loan sales for the three months ended March 31, 2023 when compared to the same period in 2022.

Net income available to common shareholders was $10.4 million, or $1.33 per diluted share, and $8.2 million, or $1.04 per diluted share, for the three months ended March 31, 2023 and 2022, respectively.

The increase in net income was a direct result of the aforementioned increases in revenues.

In addition, the increase in net income was partially offset by an increase in the provision for credit losses and an increase in noninterest expense for the quarter ended March 31, 2023.

Returns on average shareholders' equity and average assets for the three months ended March 31, 2023 were 17.48% and 1.30%, respectively, compared to 16.05% and 1.35%, respectively, for the three months ended March 31, 2022.

Results of Operations

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

FTE net interest income for the three months ended September 30, 2022 and 2021 was $24.7 million and $17.8 million, respectively.

FTE net interest income for the nine months ended September 30, 2022 and 2021 was $68.1 million and $49.1 million, respectively.

FTE interest income for the three months ended September 30, 2022 increased by $9.1 million, or 43.9%, to $29.7 million, compared to FTE interest income for the three months ended September 30, 2021.

FTE interest income for the nine months ended September 30, 2022 increased by $18.9 million, or 31.6%, to $78.5 million, compared to FTE interest income for the nine months ended September 30, 2021.

FTE net interest income for the three months ended March 31, 2023 and 2022 was $25.6 million and $19.6 million, respectively.

FTE interest income for the three months ended March 31, 2023 increased by $22.0 million, or 98.4%, to $44.3 million, compared to FTE interest income for the three months ended March 31, 2022.

This increase was due to an increase in interest and fees on loans due to loan growth and higher overall loan yields.

Interest expense for the three months ended September 30, 2022 increased by $2.2 million, or 76.0%, compared to interest expense for the three months ended September 30, 2021.

Interest expense for the nine months ended September 30, 2022 decreased by $0.1 million, or 1.0%, compared to interest expense for the nine months ended September 30, 2021.

The increase in interest expense for the three months ended September 30, 2022 was driven by an increase in interest expense on deposits, resulting from an increase in rates necessary to remain competitive in the current economic environment.

The net interest margin increased by 73 basis points to 4.12% for the three months ended September 30, 2022, compared to the three months ended September 30, 2021 and the net interest margin increased by 73 basis points to 3.81% for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

The increase in the net interest margin was due to an increase in overall loan yields and, to a lesser extent, elevated loan prepayment fees.

Interest expense for the three months ended March 31, 2023 increased by $16.0 million compared to interest expense for the three months ended March 31, 2022.

The increase in interest expense for the three months ended March 31, 2023 was driven by an increase in interest expense on deposits, resulting from an increase in rates on interest bearing deposits.

Distribution of Assets, Liabilities and Shareholders’ Equity;

Interest Rates and Interest Differential

The following tables present the average balances and yields earned on interest earning assets and average balances and weighted average rates paid on our funding liabilities for the three and nine months ended September 30, 2022 and 2021.

Three Months Ended September 30,

(Dollars in thousands) Average Balance Interest Yield / Rate (4)

Average Balance Interest Yield / Rate (4)

Cash and Fed funds sold $ 130,440 $ 747 2.27 % $ 209,500 $ 88 0.17 %

Securities (1)

120,092 829 2.76 105,030 766 2.92

Commercial real estate 1,512,381 18,830 4.87 1,270,375 14,345 4.42

Residential real estate 62,915 586 3.72 95,100 809 3.40

Construction 116,256 1,512 5.09 88,728 845 3.73

Commercial business 431,917 7,058 6.39 314,484 3,707 4.61

Consumer 12,145 142 4.65 8,870 89 3.99

Total loans 2,135,614 28,128 5.15 1,777,557 19,795 4.36

Federal Home Loan Bank stock 5,021 31 2.51 3,133 16 2.04

Total earning assets 2,391,167 $ 29,735 4.87 % 2,095,220 $ 20,665 3.86 %

Other assets 89,173 131,670

Total assets $ 2,480,340 $ 2,226,890

Liabilities and shareholders' equity:

Interest bearing liabilities:

NOW $ 119,593 $ 52 0.17 % $ 111,813 $ 51 0.18 %

Money market 828,541 2,346 1.12 824,203 1,053 0.51

Savings 189,279 474 0.99 182,848 96 0.21

Time 557,243 1,220 0.87 448,218 1,187 1.05

Total interest bearing deposits 1,694,656 4,092 0.96 1,567,082 2,387 0.60

Borrowed money 135,221 993 2.87 72,960 503 2.70

Total interest bearing liabilities 1,829,877 $ 5,085 1.10 % 1,640,042 $ 2,890 0.70 %

Noninterest bearing deposits 383,048 341,303

Other liabilities 36,037 52,552

Total Liabilities 2,248,962 2,033,897

Shareholders' equity 231,378 192,993

Total liabilities and shareholders' equity $ 2,480,340 $ 2,226,890

Net interest income (2)

$ 24,650 $ 17,775

Interest rate spread 3.77 % 3.16 %

Net interest margin (3)

4.12 % 3.39 %

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

(2) The adjustment for securities and loans taxable equivalency amounted to $49 thousand and $51 thousand for the three months ended September 30, 2022 and 2021, respectively.

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

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

Nine Months Ended September 30,

The following table presents the average balances and yields earned on interest earning assets and average balances and weighted average rates paid on our funding liabilities for the three months ended March 31, 2023 and 2022.

Three Months Ended March 31,

(Dollars in thousands) Average Balance Interest Yield / Rate (4)

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

(2) The adjustment for securities and loans taxable equivalency amounted to $148 thousand and $151 thousand for the nine months ended September 30, 2022 and 2021, respectively.

(2) The adjustment for securities and loans taxable equivalency amounted to $50 thousand and $49 thousand for the three months ended March 31, 2023 and 2022, respectively.

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

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Changes attributable to both volume and rate have been allocated proportionately based on the relationship of the absolute dollar amount of change in each.

Three Months Ended September 30, 2022 vs 2021

Increase (Decrease) Nine Months Ended September 30, 2022 vs 2021

Three Months Ended March 31, 2023 vs 2022

Increase (Decrease)

(In thousands) Volume Rate Total Volume Rate Total

(In thousands) Volume Rate Total

Interest and dividend income:

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Change in net interest income $ 6,820 $ (789) $ 6,031

Provision for Loan Losses

The provision for loan losses is based on management’s periodic assessment of the adequacy of our allowance for loan losses which, in turn, is based on interrelated factors such as the composition of our loan portfolio and its inherent risk characteristics, the level of nonperforming loans and net charge-offs, both current and historic, local economic and credit conditions, the direction of real estate values, and regulatory guidelines.

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

The provision for loan losses for the three months ended September 30, 2022 was $2.4 million compared to a provision for loan losses of $134.0 thousand for the three months ended September 30, 2021.

The provision for loan losses for the nine months ended September 30, 2022 was $1.2 million compared to a credit for loan losses of $0.2 million for the nine months ended September 30, 2021.

The increase in the provision for loan losses for the three and nine months ended September 30, 2022 was primarily driven by loan growth.

Provision for Credit Losses

The provision for credit losses is based on management’s periodic assessment of the adequacy of our ACL-Loans and ACL-Unfunded Commitments which, in turn, is based on interrelated factors such as the composition of our loan portfolio and its inherent risk characteristics, the level of nonperforming loans and net charge-offs, both current and historic, local economic and credit conditions, the direction of real estate values, and regulatory guidelines.

The provision for credit losses is charged against earnings in order to maintain our ACL-Loans and ACL-Unfunded Commitments and reflects management’s best estimate of probable losses inherent in our loan portfolio as of the balance sheet date.

The provision for credit losses for the three months ended March 31, 2023 was $0.8 million compared to a provision for credit losses of $0.2 million for the three months ended March 31, 2022.

On January 1, 2023, the Company adopted ASC 326 Financial Instruments - Credit Losses ("CECL").

Upon adoption of CECL, the Company recorded a one-time cumulative effect, pre-tax adjustment $5.1 million to the ACL-Loans and a corresponding net of tax adjustment to beginning retained earnings.

The Company also recorded a one-time cumulative effect, pre-tax adjustment of $ 1.3 million to the ACL-Unfunded commitments (which is reflected in Accrued expenses and other liabilities on the Consolidated Balance Sheets) and a corresponding net of tax adjustment to beginning retained earnings.

Noninterest Income

Noninterest income is a component of our revenue and is comprised primarily of fees generated from deposit relationships with our customers, fees generated from sales and referrals of loans, income earned on bank-owned life insurance and gains on sales of investment securities.

The following tables compare noninterest income for the three and nine months ended September 30, 2022 and 2021:

Noninterest income is a component of our revenue and is comprised primarily of fees generated from deposit relationships with our clients, fees generated from sales and referrals of loans, income earned on bank-owned life insurance and gains on sales of investment securities.

The following tables compare noninterest income for the three months ended March 31, 2023 and 2022:

Three Months Ended

September 30, Change

(Dollars in thousands) 2022 2021 $ %

Bank-owned life insurance $ 271 $ 271 $ — — %

Service charges and fees 240 199 41 20.6

(Losses) gains and fees from sales of loans (15) 924 (939) (101.6)

Other (94) 43 (137) (318.6)

Total noninterest income $ 402 $ 1,437 $ (1,035) (72.0) %

Nine Months Ended

September 30, Change

March 31, Change

(Dollars in thousands) 2023 2022 $ %

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Total noninterest income $ 1,526 $ 958 $ 568 59.3 %

Noninterest income decreased by $1.0 million to $0.4 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

Noninterest income decreased by $2.3 million to $2.5 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

The decrease in noninterest income was driven by a reduction in loan sales for the three and nine months ended September 30, 2022 when compared to the same periods in 2021.

Loan sales decreased $0.9 million and $1.0 million for the three and nine months ended September 30, 2022, respectively.

Noninterest income also declined for the nine months ended September 30, 2022 due to a one-time federal payroll tax credit for COVID-19 of $0.9 million recognized in the quarter ended March 31, 2021.

Noninterest income increased by $0.6 million to $1.5 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

The increase in noninterest income was driven by an increase in SBA loan sales during the first quarter of 2023.

Noninterest Expense

The following tables compare noninterest expense for the three and nine months ended September 30, 2022 and 2021:

The following table compares noninterest expense for the three months ended March 31, 2023 and 2022:

Three Months Ended

September 30, Change

(Dollars in thousands) 2022 2021 $ %

Salaries and employee benefits $ 5,876 $ 4,782 $ 1,094 22.9 %

Occupancy and equipment 2,035 2,615 (580) (22.2)

Professional services 994 498 496 99.6

Data processing 626 632 (6) (0.9)

Director fees 325 324 1 0.3

FDIC insurance 255 298 (43) (14.4)

Marketing 102 186 (84) (45.2)

Other 818 1,035 (217) (21.0)

Total noninterest expense $ 11,031 $ 10,370 $ 661 6.4 %

Nine Months Ended

September 30, Change

March 31, Change

(Dollars in thousands) 2023 2022 $ %

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Total noninterest expense $ 12,691 $ 9,925 $ 2,766 27.9 %

Noninterest expense increased by $0.7 million to $11.0 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

Noninterest expense increased by $1.8 million to $31.9 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

The increase in noninterest expense was primarily driven by an increase in salaries and employee benefits expense and professional services expense, partially offset by a decrease in occupancy and equipment expense.

Salaries and employee benefits expense totaled $5.9 million for the three months ended September 30, 2022, an increase of $1.1 million when compared to the same period in 2021.

Salaries and employee benefits expense totaled $16.2 million for the nine months ended September 30, 2022, an increase of $2.7 million when compared to the same period in 2021.

The increase in salaries and employee benefits expense was driven by an increase in full time equivalent employees, as well as an increase in variable compensation as a result of the Bank's overall growth and improved performance.

Full time equivalent employees totaled 140 at September 30, 2022 compared to 134 for the same period in 2021.

Average full time equivalent employees totaled 131 for the nine months ended September 30, 2022 compared to 127 for the same period in 2021.

The increase in salaries and employee benefits expense was partially offset by higher loan originations, which enabled the Bank to defer a greater amount of expenses.

Professional services expense totaled $1.0 million for the three months ended September 30, 2022, an increase of $0.5 million when compared to the same period in 2021.

Professional services expense totaled $3.0 million for the nine months ended September 30, 2022, an increase of $1.3 million when compared to the same period in 2021.

The increase in professional services expense was primarily driven by consulting fees associated with various projects, including our core system conversion.

Occupancy and equipment expense totaled $2.0 million for the three months ended September 30, 2022, a decrease of $0.6 million when compared to the same period in 2021.

Occupancy and equipment expense totaled $6.4 million for the nine months ended September 30, 2022, a decrease of $1.9 million when compared to the same period in 2021.

The decrease in occupancy and equipment expense was primarily driven by the curtailment of additional cleaning costs associated with precautions taken to prevent the spread of COVID-19 during the nine months ended September 30, 2021.

In addition, the decrease in occupancy and equipment expense was impacted by a reduction in lease expense as a result of the branch closure in New Canaan, which occurred during the third quarter of 2021.

Income tax expense for the three months ended September 30, 2022 and 2021 totaled $2.4 million and $1.8 million, respectively.

The effective tax rates for the three months ended September 30, 2022 and 2021 were 20.9% and 20.8%, respectively.

Income tax expense for the nine months ended September 30, 2022 and 2021 totaled $8.0 million and $5.1 million, respectively.

The effective tax rates for the nine months ended September 30, 2022 and 2021 were 21.3% and 21.5%, respectively.

Noninterest expense increased by $2.8 million to $12.7 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

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

Salaries and employee benefits expense totaled $6.1 million for the three months ended March 31, 2023, an increase of $1.1 million when compared to the same period in 2022.

The increase in salaries and employee benefits expense was driven by an increase in full time equivalent employees, with full time equivalent employees totaling 135 for the three months ended March 31, 2023 compared to 126 for the same period in 2022.

The increase in salaries and employee benefits expense was also due to lower loan originations, which reduced the amount of the Bank's ability to defer expenses.

Professional services expense totaled $1.3 million for the three months ended March 31, 2023, an increase of $0.3 million when compared to the same period in 2022.

The increase in professional services expense was primarily driven by consulting fees.

FDIC insurance expense totaled $1.1 million for the quarter ended March 31, 2023, an increase of $0.8 million when compared to the same period in 2022.

The increase in FDIC insurance expense is attributed to the overall balance sheet growth, increased use of brokered deposits, and an increase in FDIC insurance rates.

Income tax expense for the three months ended March 31, 2023 and 2022 totaled $3.2 million and $2.1 million, respectively.

The effective tax rates for the three months ended March 31, 2023 and 2022 were 23.4% and 20.4%, respectively.

Financial Condition

At September 30, 2022 total assets were $2.7 billion, a $266.7 million, or 10.9% increase, compared to December 31, 2021.

The increase in assets was primarily due to loan growth and a corresponding increase in deposits and borrowings.

Gross loans totaled $2.3 billion at September 30, 2022, an increase of $391.9 million compared to December 31, 2021.

Deposits totaled $2.3 billion at September 30, 2022, compared to $2.1 billion at December 31, 2021.

Total shareholders’ equity at September 30, 2022 and December 31, 2021 was $231.5 million and $202.0 million, respectively.

The increase in shareholders' equity was primarily driven by (i) net income of $29.4 million for the nine months ended September 30, 2022 and (ii) an $8.4 million favorable impact to accumulated other comprehensive income driven by fair value marks related to hedge positions involving interest rate swaps, partially offset by fair value marks on the Company's investment portfolio.

Assets totaled $3.25 billion at March 31, 2023 and remained flat compared to December 31, 2022.

Gross loans totaled $2.8 billion at March 31, 2023, an increase of $83.8 million or 3.1% compared to December 31, 2022.

Deposits totaled $2.8 billion at March 31, 2023, and remained flat compared to December 31, 2022.

Total shareholders’ equity at March 31, 2023 and December 31, 2022 was $242.3 million and $238.5 million, respectively.

The increase in shareholders' equity was primarily driven by net income of $10.4 million for the three months ended March 31, 2023.

The increase was partially offset by the Day 1 CECL adoption of $4.9 million, dividends paid of $1.6 million, and a $0.9 million unfavorable impact to accumulated other comprehensive income.

The unfavorable impact to accumulated other comprehensive income was driven by fair value marks on the Company's Available for sale investment securities portfolio of $6.1 million partially offset by fair value marks related to hedge positions involving interest rate swaps of $5.0 million.

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

The increase in shareholders’ equity was partially offset by dividends paid of $4.7 million and common stock repurchases of $5.5 million.

Loan Portfolio

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

We originate commercial real estate loans, construction loans, commercial business loans and consumer loans in our market.

We also pursue certain types of commercial lending opportunities outside our market, particularly where we have strong business relationships.

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

Total loans before deferred loan fees and the allowance for loan losses were $2.29 billion at September 30, 2022 and $1.89 billion at December 31, 2021.

Total gross loans increased $391.9 million as of September 30, 2022 compared to the year ended December 31, 2021.

Total loans before deferred loan fees and the ACL-Loans were $2.76 billion at March 31, 2023 and $2.68 billion at December 31, 2022.

Total gross loans increased $83.8 million as of March 31, 2023 compared to the year ended December 31, 2022.

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

(In thousands) At September 30, 2022 At December 31, 2021 Change

(In thousands) At March 31, 2023 At December 31, 2022 Change

Real estate loans:

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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 Company evaluates the creditworthiness of each client and extends credit of up to 85% 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.

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As of the beginning of the third quarter of 2019, the Company no longer offered home equity loans or lines of credit.

The Company’s policy for residential lending generally required that the amount of the loan may not exceed 80% of the original appraised value of the property.

In certain situations, the amount may have exceeded 80% LTV either with private mortgage insurance being required for that portion of the residential loan in excess of 80% of the appraised value of the property or where secondary financing is provided by a housing authority program second mortgage, a community’s low/moderate income housing program, or a religious or civic organization.

Credit risk management involves a partnership between our relationship managers and our credit approval, portfolio management, credit administration and collections personnel.

Credit risk management involves a partnership between our relationship managers and our credit approval, portfolio management, credit administration and collections departments.

Disciplined underwriting, portfolio monitoring and early problem recognition are important aspects of maintaining our high credit quality standards and low levels of nonperforming assets since our inception in 2002.

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

(In thousands) At September 30, 2022 At December 31, 2021

(In thousands) At March 31, 2023 At December 31, 2022

Nonaccrual loans:

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Nonaccrual loans to total gross loans 0.52 % 0.61 %

ACL-loans as a % of total loans 1.01 % 0.84 %

ACL-loans as a % of nonperforming loans 196.27 % 136.43 %

Total past due loans to total gross loans 0.94 % 0.60 %

Nonperforming assets totaled $16.8 million and represented 0.62% of total assets at September 30, 2022, compared to $16.6 million and 0.68% of total assets at December 31, 2021.

Nonaccrual loans totaled $16.8 million at September 30, 2022 and $16.6 million at December 31, 2021.

There was no other real estate owned at September 30, 2022 or December 31, 2021.

due loans decreased to $17.8 million, or 0.78% of total loans, as of September 30, 2022, compared to $32.6 million, or 1.72% of total loans, as of December 31, 2021.

Allowance for Loan Losses

We evaluate the adequacy of the allowance for loan losses at least quarterly, and in determining our allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined.

The balance of our allowance for loan losses is based on internally assigned risk classifications of loans, the Bank’s and peer banks’ historical loss experience, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates.

Nonperforming assets totaled $14.3 million and represented 0.44% of total assets at March 31, 2023, compared to $16.4 million and 0.51% of total assets at December 31, 2022.

Nonaccrual loans totaled $14.3 million at March 31, 2023 and $16.4 million at December 31, 2022.

Past due loans increased to $26.1 million, or 0.94% of total loans, as of March 31, 2023, compared to $16.1 million, or 0.60% of total loans, as of December 31, 2022.

Of the March 31, 2023 past due loans, $10.0 million of loans

were between 31 - 33 days past due and have subsequently become current.

As of April 19, 2023, past due loans were $18.6 million or 0.67% of total loans.

We evaluate the adequacy of the ACL-Loans based on "forward looking" expected losses.

Management believes that the current ACL-Loans will be adequate to absorb credit losses on existing loans that may become uncollectible based on the evaluation of known and inherent risks in the loan portfolio.

The evaluation takes into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, and specific problem loans and current economic conditions which may affect the borrowers’ ability to pay.

The evaluation also details historical losses by loan segment and the resulting credit loss rates which are projected for current loan total amounts.

Loss estimates for specified problem loans are also detailed.

All of the factors considered in the analysis of the adequacy of the ACL may be subject to change.

We estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined.

The balance of our ACL-Loans is based on internally assigned risk classifications of loans, the Bank’s and peer banks’ historical loss experience, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates.

Our general practice is to identify problem credits early and recognize full or partial charge-offs as promptly as practicable when it is determined that it is probable that the loan will not be repaid according to its original contractual terms, including principal and interest.

Full or partial charge-offs on collateral dependent impaired loans are recognized when the collateral is deemed to be insufficient to support the carrying value of the loan.

Full or partial charge-offs on collateral dependent individually evaluated loans are recognized when the collateral is deemed to be insufficient to support the carrying value of the loan.

We do not recognize a recovery when an updated appraisal indicates a subsequent increase in value of the collateral.

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Charge-offs are recorded on a monthly basis, as incurred.

Partially charged-off loans continue to be evaluated on a monthly basis and additional charge-offs or loan loss provisions may be recorded on the remaining loan balance based on the same criteria.

The following table presents the activity in our allowance for loan losses and related ratios for the dates indicated:

Partially charged-off loans continue to be evaluated on a monthly basis and additional charge-offs or provisions (credit) for credit losses may be recorded on the remaining loan balance based on the same criteria.

The following table presents the activity in our ACL-Loans and related ratios for the dates indicated:

Three Months Ended

September 30, Nine Months Ended

September 30,

(Dollars in thousands) 2023 2022

Balance at beginning of period $ 22,431 $ 16,902

CECL Day 1 Adjustment 5,079 —

Balance at beginning of period-Adjusted 27,510 16,902

Commercial real estate — —

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Commercial business — 13

Consumer — 1 1 10

Total recoveries 6 14

Net recoveries (charge-offs) 13 (3) 100 (4,024)

Provision (credit) charged to earnings 2,381 134 1,165 (182)

Net (charge-offs) recoveries (446) 10

Provision for credit losses - loans 934 229

Balance at end of period $ 27,998 $ 17,141

Net charge-offs to average loans 0.02 % — %

Allowance for loan losses to total gross loans 0.79 % 0.92 % 0.79 % 0.92 %

At September 30, 2022, our allowance for loan losses was $18.2 million and represented 0.79% of total gross loans, compared to $16.9 million, or 0.89% of total gross loans, at December 31, 2021.

The following table presents the allocation of the allowance for loan losses and the percentage of these loans to total loans for the dates indicated:

At September 30, 2022 At December 31, 2021

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

ACL-Loans to total gross loans 1.01 % 0.86 %

At March 31, 2023, our ACL-Loans was $28.0 million and represented 1.01% of total gross loans, compared to $22.4 million, or 0.84% of total gross loans, at December 31, 2022.

The following table presents the allocation of the ACL-Loans balance and the related allocation percentage of these loans across the total loan portfolio:

At March 31, 2023 At December 31, 2022

(Dollars in thousands) ACL-Loans Loans as Percent of Total Loan Portfolio ACL-Loans Loans as Percent of Total Loan Portfolio

Residential real estate $ 207 2.12 % $ 163 2.27 %

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Consumer 715 0.70 146 0.67

Total allowance for loan losses $ 18,167 100.00 % $ 16,902 100.00 %

The allocation of the allowance for loan losses at September 30, 2022 reflects our assessment of credit risk and probable loss within each portfolio.

We believe that the level of the allowance for loan losses at September 30, 2022 is appropriate to cover probable losses.

Reserve for Unfunded Commitments

The reserve for unfunded commitments provides for probable losses inherent with funding the unused portion of legal commitments to lend.

The unfunded reserve calculation is primarily based on our allowance for loan loss methodology for funded loans, adjusted for utilization expectations.

Total ACL-Loans $ 27,998 100.00 % $ 22,431 100.00 %

The allocation of the ACL-Loans at March 31, 2023 reflects our assessment of credit risk and probable loss within each portfolio.

We believe that the level of the ACL-Loans at March 31, 2023 is appropriate to cover probable losses.

ACL- Unfunded Commitments

The ACL-Unfunded Commitments provides "forward looking" losses inherent with funding the unused portion of legal commitments to lend.

The reserve for unfunded credit commitments is included within other liabilities in the accompanying Consolidated Balance Sheets.

Changes in the reserve are reported as a component of other noninterest expense in the accompanying Consolidated Statements of Income.

Changes in the ACL-Unfunded Commitments are reported as a component of the Provision for credit losses in the accompanying Consolidated Statements of Income.

Investment Securities

At September 30, 2022, the carrying value of our investment securities portfolio totaled $113.1 million and represented 4.2% of total assets, compared to $108.4 million, or 4.4% of total assets, at December 31, 2021.

The net unrealized loss position on our investment portfolio at September 30, 2022 was $10.4 million and included gross unrealized losses of $10.4 million.

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.

At March 31, 2023, the carrying value of our investment securities portfolio totaled $121.1 million and represented 3.7% of total assets, compared to $121.6 million, or 3.7% of total assets, at December 31, 2022.

The net unrealized loss position on our investment portfolio at March 31, 2023 was $8.0 million and included gross unrealized gains of $0.6 million.

The net unrealized loss position on our investment portfolio at December 31, 2022 was $9.2 million and included gross unrealized gains of $0.3 million.

Deposit Activities and Other Sources of Funds

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

(Dollars in thousands) Amount Percent Amount Percent

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Total deposits $ 2,798,308 100.00 % $ 2,800,818 100.00 %

Total deposits were $2.3 billion at September 30, 2022, an increase of $162.7 million, from the balance at December 31, 2021.

The increase in deposits is primarily a result of an increase in brokered time deposits to fund the significant loan growth during the three months ended September 30, 2022, increasing $338.1 million compared to December 31, 2021.

Brokered certificates of deposits totaled $587.5 million at September 30, 2022 and $249.4 million at December 31, 2021.

There were no certificates of deposits from national listing services at September 30, 2022 or December 31, 2021.

Brokered money market accounts totaled $30.2 million at September 30, 2022 and $104.0 million at December 31, 2021.

Brokered deposits

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

At September 30, 2022 and December 31, 2021, time deposits with a denomination of $100 thousand or more, including CDARS and other brokered deposits, totaled $710.7 million and $391.2 million, respectively, maturing during the periods indicated in the table below:

(Dollars in thousands) September 30, 2022 December 31, 2021

Total deposits were $2.8 billion at March 31, 2023, a decrease of $2.5 million, from the balance at December 31, 2022.

Brokered certificates of deposits totaled $994.4 million at March 31, 2023 and $976.5 million at December 31, 2022.

There were no certificates of deposits from national listing services at March 31, 2023 or December 31, 2022.

Brokered money market accounts totaled $32.2 million at March 31, 2023 and $50.1 million at December 31, 2022.

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).

As of March 31, 2023, our insured deposits were $2,050.5 million, or 73% of total deposits.

Insured deposits are comprised of $1,966.9 million of FDIC-insured deposits, or 70% of total deposits, and $83.6 million of deposits insured by standby letters of credit with the Federal Home Loan Bank of Boston, or 3% of total deposits.

Of the $747.8 million deposits that are uninsured, approximately $50 million are deposits held as collateral on loans made by the Bank and required, per loan documentation, to remain at the Bank.

At March 31, 2023 and December 31, 2022, time deposits with a denomination of $100 thousand or more, including CDARS and other brokered deposits, totaled $1,251.2 million and $1,157.2 million, respectively, maturing during the periods indicated in the table below:

(Dollars in thousands) March 31, 2023 December 31, 2022

Within 3 months $ 326,318 $ 251,036

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

Total FHLB advances were $90.0 million and $50.0 million at September 30, 2022 and December 31, 2021, respectively.

Total FHLB advances were $90.0 million at March 31, 2023 and December 31, 2022, respectively.

The Bank has additional borrowing capacity at the FHLB up to a certain percentage of the value of qualified collateral.

In accordance with agreements with the FHLB, the qualified collateral must be free and clear of liens, pledges and encumbrances.

At September 30, 2022, the Bank had pledged $946.9 million of eligible loans as collateral to support borrowing capacity at the FHLB of Boston.

As of September 30, 2022, the Bank had immediate availability to borrow an additional $426.4 million based on qualified collateral.

At March 31, 2023, the Bank had pledged $898.2 million of eligible loans as collateral to support borrowing capacity at the FHLB of Boston.

As of March 31, 2023, the Bank had immediate availability to borrow an additional $362.3 million based on qualified collateral.

At March 31, 2023 , the Bank had a secured borrowing line with the FRB, a letter of credit with the FHLB, and unsecured lines of credit with Atlantic Community Bankers Bank, Zions Bank and Texas Capital Bank.

The total borrowing line, letter, or line of credit and the amount outstanding at March 31, 2023 is summarized below:

March 31, 2023

Total Letter or Line of Credit Total Outstanding

(Dollars in thousands)

FRB $ 694,380 $ —

FHLB 550,166 187,883

Atlantic Community Bankers Bank 12,000 —

Zion Bank 45,000 —

Texas Capital Bank 10,000 —

Total $ 1,311,546 $ 187,883

Liquidity and Capital Resources

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

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

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

As of September 30, 2022, the Company had cash and cash equivalents of $223.1 million and available-for-sale securities of $95.1 million.

At September 30, 2022, outstanding commitments to originate loans totaled $187.3 million and undisbursed funds from approved lines of credit, home equity lines of credit and secured commercial lines of credit totaled $318.8 million.

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 FRB and 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 FRB, FHLB, lines of credit from ACBB, Zion's Bank and Texas Capital Bank, the brokered deposit market and national CD listing services.

Capital Resources

Shareholders’ equity totaled $231.5 million as of September 30, 2022, an increase of $29.5 million compared to December 31, 2021, primarily a result of (i) net income of $29.4 million for the nine months ended September 30, 2022 and (ii) an $8.4 million favorable impact to accumulated other comprehensive income driven by fair value marks related to hedge positions involving interest rate swaps, partially offset by fair value marks on the Company's investment portfolio.

Shareholde rs’ equity totaled $242.3 million as of March 31, 2023, an increase of $3.8 million compared to December 31, 2022, primarily a result of net income of $10.4 million for the three months ended March 31, 2023.

The increase was partially offset by the Day 1 CECL adoption of $4.9 million, dividends paid of $1.6 million, and a $0.9 million unfavorable impact to accumulated other comprehensive income.

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

The increase in shareholders’ equity was partially offset by dividends paid of $4.7 million and common stock repurchases of $5.5 million.

As of September 30, 2022, the tangible common equity ratio and fully diluted tangible book value per share were 8.41% and $29.68, respectively.

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.

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

At September 30, 2022, the Bank met all capital adequacy requirements to which it was subject and exceeded the regulatory minimum capital levels to be considered well-capitalized under the regulatory framework for prompt corrective action.

At September 30, 2022, the Bank’s ratio of Common Equity Tier 1 capital to risk-weighted assets was 11.42%, total capital to risk-weighted assets was 12.16%, Tier 1 capital to risk-weighted assets was 11.42% and Tier 1 capital to average assets was 11.31%.

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

banking organizations.

Under the rules, effective January 1, 2015 for the Company and the Bank, the minimum capital ratios became a) 4.5% Common Equity Tier 1 to risk-weighted assets, b) 6.0% Tier 1 capital to risk weighted assets and c) 8.0% total capital to risk-weighted assets.

In addition, the new regulations imposed certain limitations on dividends, share buy-backs, discretionary payments on Tier 1 instruments and discretionary bonuses to executive officers if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity to risk weighted assets, in addition to the amounts necessary to meet the minimum risk-based capital requirements described above.

At March 31, 2023, the Bank met all capital adequacy requirements to which it was subject and exceeded the regulatory minimum capital levels to be considered well-capitalized under the regulatory framework for prompt corrective action.

At March 31, 2023, the Bank’s ratio of Common Equity Tier 1 capital to risk-weighted assets was 10.17%, total capital to risk-weighted assets was 11.16%, Tier 1 capital to risk-weighted assets was 10.17% and Tier 1 capital to average assets was 9.22%.

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.

Asset/Liability Management and Interest Rate Risk

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(ii) new business loan rates that are based on recent new business origination experience;

and (iii) deposit pricing assumptions for non-maturity deposits reflecting the Bank’s limited history, management judgment and core deposit studies.

and (iii) deposit pricing assumptions for non-maturity deposits reflecting the Bank’s history, management judgment and core deposit studies.

Combined, these assumptions can be inherently uncertain, and as a result, actual results may differ from simulation forecasts due to the timing, magnitude and frequency of interest rate changes, future business conditions, as well as unanticipated changes in management strategies.

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Simulation analysis involves projecting a future balance sheet structure and interest income and expense under the various rate scenarios.

Internal policy regarding internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net interest income at risk for the subsequent one-year period should not decline by more than:

should not decline by more than:

6% for a 100 basis point shift;

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Per Company policy, the Bank should not be outside these limits for twelve consecutive months unless the Bank's forecasted capital ratios are considered to be "well capitalized".

As of September 30, 2022, the Bank met all minimum regulatory capital requirements to be considered "well capitalized" (reference footnote 7 to the consolidated financial statements for more detail).

The following tables set forth the estimated percentage change in our net interest income at risk over one-year simulation periods beginning September 30, 2022 and December 31, 2021:

As of March 31, 2023, the Bank has met all minimum regulatory capital requirements to be considered "well capitalized".

The following tables set forth the estimated percentage change in our net interest income at risk over one-year simulation periods beginning March 31, 2023 and December 31, 2022:

Parallel Ramp Estimated Percent Change in Net Interest Income

Rate Changes (basis points) September 30, 2022 December 31, 2021

Rate Changes (basis points) March 31, 2023 December 31, 2022

-100 2.00 % 2.20 %

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Parallel Shock Estimated Percent Change in Net Interest Income

Rate Changes (basis points) September 30, 2022 December 31, 2021

Rate Changes (basis points) March 31, 2023 December 31, 2022

-100 1.60 % 2.20 %

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+300 (7.80) (8.90)

The net interest income at risk simulation results indicate that, as of September 30, 2022, we remain liability sensitive.

The net interest income at risk simulation results indicate that, as of March 31, 2023, we remain liability sensitive.

The liability sensitivity is due to the fact that there are more liabilities than assets subject to repricing as market rates change.

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

Rate Changes (basis points) September 30, 2022 December 31, 2021

Rate Changes (basis points) March 31, 2023 December 31, 2022

-100 1.50 % 2.30 %

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ALCO has modeled increased costs of deposits in the rising rate simulation scenarios presented above.

It should be noted that the static balance sheet assumption does not necessarily reflect our expectation for future balance sheet growth, which is a function of the business environment and customer behavior.

Another significant simulation assumption is the sensitivity of core deposits to fluctuations in interest rates.

4 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-Q

Item 2. Management’s Discussion and Analysis