Alternative Minimum Tax: The Internal Revenue Code of 1986, as amended (the “Code”), imposes an alternative minimum tax (“AMT”) at a rate of 20.0% on a base of regular taxable income plus certain tax preferences which we refer to as “alternative minimum taxable income.” The AMT is payable to the extent such alternative minimum taxable income is in excess of an exemption amount and the AMT exceeds the regular income tax. Net operating losses can offset no more than 90.0% of alternative minimum taxable income. Certain AMT payments may be used as credits against regular tax liabilities in future years. We have not been subject to the AMT and have no such amounts available as credits for carryover.
Net Operating Loss Carryovers: For the years ended 20172018 and prior a corporation may carry back generated net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. For net operating losses arising in tax years after 2017,2018, a corporation may not carryback the net operating loss but may carryforward such losses indefinitely, however the net operating loss deduction in a given year is limited to 80% of taxable income. At December 31, 2017,2020, we had $2.6$2.1 million of net operating loss carryforwards for federal income tax purposes. The carryovers were transferred to the Company upon the merger with The Wilton Bank.
Corporate Dividends-Received Deduction: The Company may exclude from its income 100.0% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends received deduction is 80.0% in the case of dividends received from corporations with which a corporate recipient does not file a consolidated tax return, and corporations which own less than 20.0% of the stock of a corporation distributing a dividend may deduct only 70.0% of dividends received or accrued on their behalf.
The Company and the Bank are not currently under audit with respect to their federal tax returns.
State Taxation
We are subject to the Connecticut corporation business tax. The Connecticut corporation business tax is based on the federal taxable income before net operating loss and special deductions and makes certain modifications to federal taxable income to arrive at Connecticut taxable income. Connecticut taxable income is multiplied by the state tax rate (7.5% for the fiscal years ending December 31, 20172020 and 2016)2019) to arrive at Connecticut income tax. We are also subject to state income tax in other states as a result of loan originations made in other states.
The Company and the Bank are not currently under audit with respect to their state tax returns.
Item 1A. Risk Factors
Risks Relating to Our Business
As a business operating in the financial services industry, our business and operations may be adversely affected in numerous and complex ways by weak economic conditions.
Our businesses and operations, which primarily consist of lending money to customers in the form of loans, borrowing money from customers in the form of deposits and investing in securities, are sensitive to general business and economic conditions in the United States.States and to a lesser degree secondary effects of global geopolitical events. If the U.S. economy
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weakens, our growth and profitability from our lending, deposit and investment operations could be constrained. Uncertainty about the federal fiscal policymaking process, the mediummedium-term and long termlong-term fiscal outlook of the federal government, and future tax rates is a concern for businesses, consumers and investors in the United States. In addition, economic conditions in foreign countries, including uncertainty over the stability of the euro currency, could affect the stability of global financial markets, which could hinder U.S. economic growth. Weak economic conditions are characterized by deflation, fluctuations in debt and equity capital markets, a lack of liquidity and/or depressed prices in the secondary market for mortgage loans, increased delinquencies on mortgage, consumer and commercial loans, residential and commercial real estate price declines and lower home sales and commercial activity. The current economic environment is also characterized by interest rates at historically low levels, which impacts our ability to attract deposits and to generate attractive earnings through our investment portfolio. All of these factors are detrimental to our business, and the interplay between these factors can be complex and unpredictable. Our business is also significantly affected by monetary and related policies of the U.S. federal government and its agencies. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control. Adverse economic conditions and government policy responses to such conditions could have a material adverse effect on our business, financial condition, results of operations and prospects.
We may not be able to adequately measure and limit our credit risk, which could lead to unexpected losses.
The business of lending is inherently risky, including risks that the principal of or interest on any loan will not be repaid timely or at all or that the value of any collateral supporting the loan will be insufficient to cover our outstanding exposure. These risks may be affected by the strength of the borrower’s business sector and local, regional and national market and economic conditions. Our risk management practices, such as monitoring the concentration of our loans within specific industries and our credit approval practices, may not adequately reduce credit risk, and our credit administration personnel, policies and procedures may not adequately adapt to changes in economic or any other conditions affecting customers and the quality of the loan portfolio. Finally, many of our loans are made to middle marketmiddle-market businesses that may be less able to withstand competitive, economic and financial pressures than larger borrowers. A failure to effectively measure and limit the credit risk associated with our loan portfolio could have a material adverse effect on our business, financial condition, results of operations and future prospects.
Our allowance for loan losses may not be adequate to absorb losses inherent in our loan portfolio, which could have a material adverse effect on our financial condition and results of operations.
We maintain an allowance for loan losses to provide for losses inherent in our loan portfolio. Maintaining an adequate allowance for loan losses is critical to our financial results and condition. The level of our allowance for loan losses reflects management’s continuing evaluation of general economic conditions, diversification and seasoning of the loan portfolio, historic loss experience, identified credit problems, delinquency levels and adequacy of collateral. The determination of the appropriate level of the allowance for loan losses is inherently highly subjective and requires us to make significant estimates of and assumptions regarding current credit risks and future trends, all of which may undergo material changes. Inaccurate management assumptions, continuing deterioration of economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require us to increase our allowance for loan losses. In addition, our regulators, as an integral part of their examination process, review our loans and the adequacy of our allowance for loan losses and may direct us to make additions to our allowance for loan losses based on
their judgments about information available to them at the time of their examination. Further, if actual charge-offs in future periods exceed the amounts allocated to our allowance for loan losses, we may need additional provision for loan losses to restore the adequacy of our allowance for loan losses. If we are required to materially increase our level of allowance for loan losses for any reason, such increase could have a material adverse effect on our business, financial condition, results of operations and future prospects.
Our concentration of large loans to certain borrowers may increase our credit risk.
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nonperforming loans and our allowance for loan losses could increase significantly, which could adversely and materially affect our business, financial condition and results of operations.
Our commercial real estate loan, commercial loan and construction loan portfolios expose us to risks that may be greater than the risks related to our other mortgage loans.
Our loan portfolio includes non-owner-occupied commercial real estate loans for individuals and businesses for various purposes, which are secured by commercial properties. These loans typically involve repayment dependent upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service. Commercial real estate loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy because commercial real estate borrowers’ ability to repay their loans depends on successful leasing of their properties, in addition to the factors affecting residential real estate borrowers. These loans also involve greater risk because they generally are not fully amortizing over the loan period, but have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or sell the underlying property in a timely manner.
These loans expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans typically cannot be liquidated as easily as residential real estate. If we foreclose on these loans, our holding period for the collateral typically is longer than for a 1 – 4 family residential property because there are fewer potential purchasers of the collateral. Additionally, non-owner-occupiedNon-owner-occupied commercial real estate loans generally involve relatively large balances to single borrowers or related groups of borrowers. Accordingly, charge-offs on non-owner occupied commercial real estate loans may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios.
Commercial loans are typically based on the borrowers’ ability to repay the loans from the cash flow of their businesses. These loans may involve greater risk because the availability of funds to repay each loan depends substantially on the success of the business itself. In addition, the assets securing the loans have the
following characteristics: (a) they depreciate over time, (b) they are difficult to appraise and liquidate, and (c) they fluctuate in value based on the success of the business.
Risk of loss on a construction loan depends largely upon whether our initial estimate of the property’s value at completion of construction equals or exceeds the cost of the property construction (including interest), the availability of permanent takeout financing, the completion of the project and/or the builder’s ability to ultimately lease or sell the property. During the construction phase, a number of factors can result in delays and cost overruns. If estimates of value are inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan or by sale of collateral.
Our underwriting, review and monitoring cannot eliminate all of the risks related to these loans. Unexpected deterioration in the credit quality of our commercial real estate loan, commercial loan or construction loan portfolios would require us to increase our provision for loan losses, which would reduce our profitability and could have a material adverse effect on our business, financial condition, results of operations and future prospects.
Lack of seasoning of our loan portfolio could increase risk of credit defaults in the future.
As a result of our growth over the past recent years, a large portion of loans in our loan portfolio and of our lending relationships are of relatively recent origin. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process referred to as “seasoning”.“seasoning.” As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio. Because a large portion of our portfolio is relatively new, the current level of delinquencies and defaults may not represent the level that may prevail as the portfolio becomes more seasoned and may not serve as a reliable basis for predicting the health and nature of our loan portfolio, including net charge-offs and the ratio of nonperforming assets in the future. Our limited experience with these loans does not provide us with a significant payment history pattern with which to judge future collectability. As a result, it may be difficult to predict the future performance of our loan portfolio. If defaults increase, we could experience an increase in delinquencies and charge-offs and we may be required to increase our allowance for loan losses, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
A prolonged downturn in the real estate market could result in losses and adversely affect our profitability.
As of December 31, 2017, approximately 83%2020, the majority of our loan portfolio was composed of commercial and consumer real estate loans. The sale of real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. A decline in real estate values could impair the value of our collateral and our ability to sell the collateral upon any foreclosure, which would likely require us to increase our provision for loan losses. In the event of a default with respect to any of these loans, the amounts we receive upon sale of the collateral may be insufficient to recover the outstanding principal and interest on the loan. If we are required to re-value the collateral securing a loan to satisfy the debt during a period of reduced real estate values or to increase our allowance for loan losses, our profitability could be adversely affected, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
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We are subject to interest rate risk that could negatively impact our profitability.
Our profitability, like that of most financial institutions, depends to a large extent on our net interest income, which is the difference between our interest income on interest earninginterest-earning assets, such as loans and investment securities, and our interest expense on interest-bearinginterest bearing liabilities, such as deposits and borrowings.
Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the U.S. Federal Reserve Board, or the Federal Reserve, or the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the interest we pay on deposits and borrowings, but such changes could also affect our ability
to originate loans and obtain deposits, the fair value of our financial assets and liabilities, and the average duration of our assets. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore net income, could be adversely affected. A continuation of the current levels of historically low interest rates could cause the spread between our loan yields and our deposit rates paid to compress our net interest margin and our net income could be adversely affected. Further, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our business, financial condition, results of operations and future prospects.
In addition, an increase in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current loan obligations. These circumstances could not only result in increased loan defaults, foreclosures and charge-offs, but also necessitate further increases to our allowance for loan losses, each of which could have a material adverse effect on our business, results of operations, financial condition and future prospects.
Our business is concentrated in Fairfield and New Haven Counties, Connecticut and the surrounding areas, and we are more sensitive than our more geographically diversified competitors to adverse changes in the local economy.
We conduct a majority of our operations in the New York metropolitan area, including Fairfield and New Haven Counties, Connecticut. A majority of the real estate loans in our loan portfolio are secured by properties located in the New York metropolitan area, including Fairfield and New Haven Counties. In addition, as of December 31, 2017,2020, the majority of the loans in our loan portfolio (measured by dollar amount) were made to borrowers who live or conduct business in the New York metropolitan area. We compete against a number of financial institutions who maintain significant operations located outside of the New York metropolitan area and outside the State of Connecticut. Accordingly, any regional or local economic downturn, or natural or man-made disaster, that affects Connecticut or the New York metropolitan area or existing or prospective property or borrowers in Connecticut or the New York metropolitan area may affect us and our profitability more significantly and more adversely than our more geographically diversified competitors, which could cause a material adverse effect on our business, financial condition, results of operations and prospects.
Strong competition within our market area could reduce our profits and slow growth.
Competition in the financial services industry in our market and the surrounding area is strong. Numerous commercial banks, savings banks and savings associations maintain offices or are headquartered in or near our primary market area. Commercial banks, savings banks, savings associations, money market funds, mortgage brokers, finance companies, credit unions, insurance companies, investment firms and private lenders compete with us for various segments of our business. These competitors often have far greater resources than we do and are able to conduct more intensive and broader based promotional efforts to reach both commercial and individual customers.
Our ability to compete successfully will depend on a number of factors, including, among other things:
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Our ability to build and maintain long-term customer relationships while ensuring high ethical standards and safe and sound banking practices;
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The scope, relevance and pricing of products and services that we offer;
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Customer satisfaction with our products and personalized services;
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Industry and general economic trends; and
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Our ability to keep pace with technological advances and to invest in new technology.
Increased competition could require us to increase the rates we pay on deposits or lower the rates we offer on loans, which could reduce our profitability. We derive a majority of our business from our primary market area, the New York metropolitan area, including Fairfield and New Haven Counties, Connecticut. Our failure to compete effectively in our primary market could cause us to lose market share and could have a material adverse effect on our business, financial condition, results of operations and future prospects.
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We are a community bank and our ability to maintain our reputation is critical to the success of our business.
We are a community bank, and our reputation is one of the most valuable components of our business. We strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results may be materially adversely affected.
We may not be able to execute our management team’s growth strategy.
As part of our management team’s growth strategy, we pursue a business plan focused on the development and growth of our franchise in our existing market and surrounding areas. In addition to pursuing organic growth, another element of our management team’s strategy will be to acquire other branches, whole financial institutions or related lines of business. We intend to actively seek potential acquisition opportunities. There are numerous risks that may make it difficult for us to execute this growth strategy and we cannot assure you that we will be successful in executing any part of our management team’s strategy or that we will be able to maintain our historical rate of growth.strategy. Challenges we will face include obtaining regulatory approvals with respect to acquisitions, assuring that we will not become subject to regulatory actions in the future that could restrict our growth, identifying appropriate targets for acquisitions, negotiating acquisitions on terms that are acceptable to us, and encountering competition for acquisitions from financial institutions and other entities with similar business strategies that have greater financial resources, relevant experience and more personnel than us. Accordingly, there can be no assurance that we will be successful in completing future acquisitions at all or on terms that are acceptable to us. Our ability to grow will be limited if we are unable to successfully make acquisitions in the future.
We face various technological risks that could adversely affect our business.
We rely on communication and information systems to conduct business. Potential failures, interruptions or breaches in system security could result in disruptions or failures in our key systems, such as general ledger, deposit or loan systems. The risk of electronic fraudulent activity within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting bank accounts and other customer information is on the rise. We have developed policies and procedures aimed at preventing and limiting the effect of failure, interruption or security breaches, including cyber-attacks of information systems; however, there can be no assurance that these incidences will not occur, or if they do occur, that they will be appropriately addressed. The occurrence of any failures, interruptions or security breaches, including cyber-attacks of our information systems could damage our reputation, result in the loss of business, subject us to increased regulatory scrutiny or subject us to civil litigation and possible financial liability, any of which could have an adverse effect on our results of operation and financial condition.
Unauthorized access, cyber-crime and other threats to data security may require significant resources, harm our reputation, and adversely affect our business.
We necessarily collect, use and hold personal and financial information concerning individuals and businesses with which we have a banking relationship. Threats to data security, including unauthorized access and cyber-attacks, rapidly emerge and change, exposing us to additional costs for protection or remediation and competing time constraints to secure our data in accordance with customer expectations, statutory and regulatory privacy and other requirements. It is difficult or impossible to defend against every risk being posed by changing technologies, as well as criminal intent on committing cyber-crime. Increasing sophistication of cyber-criminals and terrorists make keeping up with new threats difficult and could result in a breach. Controls employed by our information technology department and our other employees and vendors could prove inadequate. We could also experience a breach due to intentional or negligent conduct on the part of employees or other internal sources, software bugs or other technical malfunctions, or other causes. As a result of any of these threats, our customer accounts may become vulnerable to account takeover schemes or cyber-fraud. Our systems and those of our third-party vendors may also become vulnerable to damage or disruption due to circumstances beyond our or their control, such as from catastrophic events, power anomalies or outages, natural disasters, network failures, and viruses and malware.
A breach of our security that results in unauthorized access to our data could expose us to a disruption or challenges relating to our daily operations as well as to data loss, litigation, damages, fines and penalties, significant increases in compliance costs, and reputational damage, any of which could have a material adverse effect on our business, results of operations, financial condition and future prospects.
Some institutions we may acquire may have distressed assets and there can be no assurance that we would be able to realize the value we predict from these assets or that we would make sufficient provision for future losses in the value of, or accurately estimate the future write downs taken in respect of, these assets.
Declines in home prices and/or weak general economic conditions may result in increases in delinquencies and losses in the loan portfolios and other assets of financial institutions that we may acquire in amounts that exceed our initial forecasts developed during the due diligence investigation prior to acquiring those institutions. In addition, the loss reserves of institutions we may acquire may prove inadequate or be negatively affected, and asset values may be impaired,
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in the future due to factors we cannot predict, including significant deterioration in economic conditions and further declines in collateral values and credit quality indicators. Any of these events could adversely affect the financial condition, liquidity, capital position and value of any institutions that we acquire and of the Bank as a whole.
We may not be able to overcome the integration and other risks associated with acquisitions, which could adversely affect our growth and profitability.
We may from time to time consider acquisition opportunities that we believe complement our activities and have the ability to enhance our profitability. In addition to The Wilton Bank and Quinnipiac transactions completed in 2013 and 2014, our acquisitionAcquisition activities could be material to our business and involve a number of risks, including the following:
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Incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, resulting in our attention being diverted from the operation of our existing business;
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Using inaccurate estimates and judgments to evaluate credit, operations, management and market risks with respect to the target institution or assets;
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Intense competition from other banking organizations and other inquirers for acquisitions;
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Potential exposure to unknown or contingent liabilities of banks and businesses we acquire;
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The time and expense required to integrate the operations and personnel of the combined businesses;
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Experiencing higher operating expenses relative to operating income from the new operations;
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Creating an adverse short-term effect on our results of operations;
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Losing key employees and customers as a result of an acquisition that is poorly received;
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Significant problems relating to the conversion of the financial and customer data of the entity;
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Inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the acquisition; or
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Risks of impairment to goodwill or other than temporary impairment.
Depending on the condition of any institution or assets or liabilities that we may acquire, that acquisition may, at least in the near term, adversely affect our capital and earnings and, if not successfully integrated with our organization, may continue to have such effects over a longer period. We may not be successful in overcoming these risks or any other problems encountered in connection with pending or potential acquisitions, and any acquisition we may consider will be subject to prior regulatory approval. Our inability to overcome these risks could have an adverse effect on our profitability, return on equity and return on assets, our ability to implement our business strategy and enhance shareholder value, which, in turn, could have a material adverse effect on our business, financial condition, results of operations and prospects. Further, if we experience difficulties with the integration process, the anticipated benefits of the investment or acquisition transaction may not be realized fully or at all or may take longer to realize than expected.
As a result of an investment or acquisition transaction, we may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on our financial condition and results of operations, which could cause you to lose some or all of your investment.
We must conduct due diligence investigations of target institutions we intend to acquire. Intensive due diligence is time consuming and expensive due to the operations, accounting, finance and legal professionals who must be involved in the due diligence process. Even if we conduct extensive due diligence on a target institution with which we combine, this diligence may not reveal all material issues that may affect a particular target institution, and factors outside the control of the target institution and outside of our control may later arise. If, during our diligence process, we fail to identify issues specific to a target institution or the environment in which the target institution operates, we may be forced to later write down or write off assets, restructure our operations, or incur impairment or other charges that could result in our reporting losses. These charges may also occur if we are not successful in integrating and managing the operations of the target institution with which we combine. In addition, charges of this nature may cause us to violate net worth or other covenants to which we may be subject as a result of assuming preexisting debt held by a target institution or by virtue of our obtaining debt financing.
Our lending limit may restrict our growth and prevent us from effectively implementing our business strategy.
We are limited in the amount we can loan to a single borrower by the amount of our capital. Under Connecticut banking law, the total direct or indirect liabilities of any one obligor that are not fully secured,
however incurred, to any Connecticut bank, exclusive of such bank’s investment in the investment securities of such obligor, shall not exceed at the time incurred 15% of the equity capital and allowance for loan losses of such bank. The total direct or indirect liabilities of any one obligor that are fully secured, however incurred, to any Connecticut bank, exclusive of such bank’s investment in the investment
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securities of such obligor, shall not exceed at the time incurred 10% of the equity capital and allowance for loan losses of such bank, provided this limitation shall be separate from and in addition to the limitation on liabilities that are not fully secured. We have also established an informal, internal lending limit to one relationship of up to 40% of unimpaired capital and allowance for loan losses, if secured by commercial real estate. A relationship in this instance is defined as loans made to different entities but with a shared borrower principal(s). For individual loans, limits are set so as not to exceed the statutory maximum of 15% of unimpaired capital and allowance for loan losses. Based upon our current capital levels and our informal, internal limit on loans, the amount we may lend both in the aggregate and to any one borrower is significantly less than that of many of our competitors and may discourage potential borrowers who have credit needs in excess of our lending limit from doing business with us. We accommodate larger loans by selling participations in those loans to other financial institutions, but this strategy may not always be available. If we are unable to compete effectively for loans from our target customers, we may not be able to effectively implement our business strategy, which could have a material adverse effect on our business, financial condition, results of operations and future prospects.
We are dependent on our executive management team and other key employees and we could be adversely affected by the unexpected loss of their services.
We are led by an experienced core management team with substantial experience in the market that we serve, and our operating strategy focuses on providing products and services through long-term relationship managers. Accordingly, our success depends in large part on the performance of our key personnel, as well as on our ability to attract, motivate and retain highly qualified senior and middle management. Competition for employees is intense, and the process of locating key personnel with the combination of skills and attributes required to execute our business plan may be lengthy. In particular, weWe believe that retaining the services and skills of our management team including Mr. Gruseke, Ms. DeWyngaert, Ms. Chivily, Mr. Dineen, Mr. Ivanov, and Ms. Waitz is important to our success. The unexpected loss of services of any of these or otherour key personnel could have an adverse impact on us because of their skills, knowledge of our market, years of industry experience and the difficulty of promptly finding qualified replacement personnel. If the services of any of our key personnel should become unavailable for any reason, we may not be able to identify and hire qualified persons on terms acceptable to us, which could cause a material adverse effect on our business, financial condition, results of operations and prospects.
The fair value of our investment securities can fluctuate due to factors outside of our control.
Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions with respect to individual securities, defaults by the issuer or with respect to the underlying securities, and changes in market interest rates and continued instability in the capital markets. Any of these factors, among others, could cause other-than-temporary impairments and realized and/or unrealized losses in future periods and declines in other comprehensive income, which could materially and adversely affect our business, results of operations, financial condition and prospects. The process for determining whether impairment of a security is other-than-temporary usually requires complex, subjective judgments about the future financial performance and liquidity of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security.
We may be required to repurchase mortgage loans or indemnify buyers against losses in some circumstances, which could harm liquidity, results of operations and financial condition.
When mortgage loans are sold, whether as whole loans or pursuant to a securitization, we are required to make customary representations and warranties to purchasers, guarantors and insurers, including government-sponsored entities, about the mortgage loans and the manner in which they were originated. Whole loan sale agreements require us to repurchase or substitute mortgage loans, or indemnify buyers
against losses, in the event we breach these representations or warranties. In addition, we may be required to repurchase mortgage loans as a result of early payment default of the borrower on a mortgage loan. If repurchase and indemnity demands increase and such demands are valid claims and are in excess of our provision for potential losses, our liquidity, results of operations and financial condition may be adversely affected.
We are subject to losses due to fraudulent and negligent acts on the part of loan applicants, our borrowers, other vendors and our employees.
When we originate loans, we rely heavily upon information supplied by third parties, including the information contained in the loan application, property appraisal, title information and employment and income documentation. If any of this information is intentionally or negligently misrepresented and such misrepresentation is not detected prior to loan funding, the value of the loan may be significantly lower than expected. Whether a misrepresentation is made by the loan applicant, the borrower, another third party or one of our employees, we generally bear the risk of loss associated with the misrepresentation. A loan subject to a material misrepresentation is typically unsaleable or subject to repurchase if it is sold prior to detection of the misrepresentation, and the persons and entities involved are often difficult to locate and it is often difficult to collect any monetary losses that we have suffered from them. We have controls and processes designed to help us identify misrepresented information in our loan origination operations. We cannot assure you, however, that we have detected or will detect all misrepresented information in our loan originations.
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We are subject to environmental liability risk associated with our lending activities.
In the course of our business, we may purchase real estate, or we may foreclose on and take title to real estate. As a result, we could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination or may be
required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. Any significant environmental liabilities could cause a material adverse effect on our business, financial condition, results of operations and future prospects.
LIBOR is used extensively in the United States as a benchmark for various commercial and financial contracts, including adjustable rate mortgages, corporate debt, interest rate swaps and other derivatives. LIBOR is set based on interest rate information reported by certain banks. There is no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. Other rates or benchmarks may perform differently than LIBOR. It is also uncertain what will happen with instruments that rely on LIBOR for future interest rate adjustments and which remain outstanding if LIBOR ceases to goodwill.exist.
We test our goodwill for impairment at least annually. Significant negative industry or economic trends, reduced estimateshave derivative contracts and limited loan exposure tied to LIBOR. Although we are not yet able to assess what the ultimate impact of future cash flows or disruptionsthe transition from LIBOR will be, failure to our business, could indicate that goodwill might be impaired. Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely on projections of future operating performance. Projections of future operating results and cash flows may vary significantly from actual results. Additionally, if our analysis results in impairment to our goodwill, we would be required to record a non-cash charge to earnings in our financial statements duringadequately manage the period in which such impairment is determined to exist. Any such chargetransition could have a material adverse effect on our business, financial condition and results of operations.
The Coronavirus (COVID-19) pandemic is adversely affecting us and our customers, and these adverse impacts on our business, financial position, results of operations, and prospects could be significant.
In March 2020, the World Health Organization declared novel coronavirus disease 2019 ("COVID-19") as a global pandemic. The COVID-19 pandemic has negatively impacted the global and U.S. economies. Many businesses in the U.S., including those in the markets we serve, were required to close, causing a significant increase in unemployment and loss of revenue for those businesses. These developments have impacted the macroeconomic environment, leading to lower interest rates, depressed equity market valuations, heightened financial market volatility, and significant disruption in banking and other financial activities.
In response to the economic impact of COVID-19, the U.S. Government and related regulatory authorities provided fiscal and monetary stimuli. In March 2020, the U.S. Government enacted a $2 trillion stimulus bill referred to as the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The CARES Act included, among other things, direct payments to individuals and families, a loan program for small businesses, expansion of unemployment benefits and monetary support to state and local governments. There can be no assurance that these actions taken will stimulate the economy or prevent recessionary conditions.
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. However, we are unable to estimate the full impact of COVID-19 on our business and operations at this time, including the ability of our employees and our third-party vendors to work effectively during the course of the pandemic. The pandemic could cause us to experience an increase in the number of loan delinquencies, defaults and charge-offs, additional provisions for credit losses, adverse asset values of the collateral securing loans and an overall material adverse effect on the quality of the loan portfolio of the Company, impairment of our goodwill, reduced demand for our products and services, or other negative impacts on our financial position, results of operations, and prospects. 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 and what further actions may be taken by governmental authorities in response to the pandemic.
The length of the pandemic and the efficacy of the extraordinary measures being put in place to address it are unknown. To the extent COVID-19 continues to adversely impact the economy, it may also increase the likelihood and/or magnitude of other risk factors described herein.
Risks Applicable to the Regulation of our Industry
We operate in a highly regulated environment, which could have a material and adverse impact on our operations and activities, financial condition, results of operations, growth plans and future prospects.
Banking is highly regulated under federal and state law. We are subject to extensive regulation and supervision that governs almost all aspects of our operations. As a registered bank holding company, we are subject to supervision, regulation
25
and examination by the Federal Reserve. As a commercial bank chartered under the laws of Connecticut, the Bank is subject to supervision, regulation and examination by the State of Connecticut Department of Banking and the FDIC.
The primary goals of the bank regulatory system are to maintain a safe and sound banking system and to facilitate the conduct of sound monetary policy. This system is intended primarily for the protection of the FDIC’s Deposit Insurance Fund and bank depositors, rather than our shareholders and creditors. The banking agencies have broad enforcement power over bank holding companies and banks, including the authority, among other things, to enjoin “unsafe or unsound” practices, require affirmative action to correct any violation or practice, issue administrative orders that can be judicially enforced, direct increases in capital, direct the sale of subsidiaries or other assets, limit dividends and distributions, restrict growth, assess civil monetary penalties, remove officers and directors, and, with respect to banks, terminate our charter, terminate our deposit insurance or place the Bank into conservatorship or receivership. In general, these enforcement actions may be initiated for violations of laws and regulations or unsafe or unsound practices.
Compliance with the myriad of laws and regulations applicable to our organization can be difficult and costly. In addition, these laws, regulations and policies are subject to continual review by governmental authorities, and changes to these laws, regulations and policies, including changes in interpretation or implementation of these laws, regulations and policies, could affect us in substantial and unpredictable ways and often impose additional compliance costs. Further, any new laws, rules and regulations, such as the Dodd-Frank Act, could make compliance more difficult or expensive. All of these laws and regulations, and the supervisory framework applicable to our industry, could have a material adverse impact on our operations and activities, financial condition, results of operations, growth plans and future prospects.
Federal and state regulators periodically examine our business and we may be required to remediate adverse examination findings.
The Federal Reserve, the FDIC and the Connecticut Department of Banking periodically examine our business, including our compliance with laws and regulations. If, as a result of an examination, a regulatory agency were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, it may take a number of different remedial actions as it deems
appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship. Any regulatory action against us could have a material adverse effect on our business, results of operations, financial condition and future prospects.
The Bank’s FDIC deposit insurance premiums and assessments may increase.
The deposits of the Bank are insured by the FDIC up to legal limits and, consequently, subject it to the payment of FDIC deposit insurance assessments. The Bank’s regular assessments are determined by its risk classification, which is based on its regulatory capital levels and the level of supervisory concern that it poses. Any future special assessments, increases in assessment rates or required prepayments in FDIC insurance premiums could reduce our profitability or limit our ability to pursue certain business opportunities, which could materially and adversely affect our business, financial condition, results of operations and prospects.
The Bank is subject to further reporting requirements under FDIC regulations.
We are subject to further reporting requirements under the rules of the FDIC for the year ended December 31, 20172020 as the Bank’s total assets exceed $1.0 billion, including a requirement for management to prepare a report that contains an assessment by management of the Bank’s effectiveness of internal control structure and procedures for financial reporting as of the end of such fiscal year. In addition, we are required to obtain an independent public accountant’s attestation report concerning our internal control structure over financial reporting. The rules for management to assess the Bank’s internal controls over financial reporting are complex, and require significant documentation, testing and possible remediation. The effort to comply with regulatory requirements relating to internal controls cause us to incur increased expenses and a diversion of management’s time and other internal resources. If the Bank cannot favorably assess the effectiveness of its internal controls over financial reporting, or if its independent registered public accounting firm is unable to provide an unqualified attestation report on the Bank’s internal controls, the price of our common stock as well as investor confidence could be adversely affected and we may be subject to additional regulatory scrutiny.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act, or CRA, and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
Various laws impose nondiscriminatory lending requirements on financial institutions, including the CRA, the Equal Credit Opportunity Act and the Fair Housing Act. A successful regulatory challenge to an institution’s performance under the
26
CRA or fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition, results of operations and prospects.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
Financial institutions are required to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate under The Bank Secrecy Act, The USA PATRIOT ACT of 2001 and certain other laws and regulations. Significant civil penalties can be assessed by a variety of regulators and governmental agencies for violations of these laws and regulations. If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business
plan, including our acquisition plans. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could materially and adversely affect our business, financial condition, results of operations and prospects.
General Risk Factors
Resources could be expended in considering or evaluating potential acquisitions that are not consummated, which could materially and adversely affect subsequent attempts to locate and acquire or merge with another business.
We anticipate that the process of identifying and investigating institutions for potential acquisitions and the negotiation, drafting and execution of relevant agreements, disclosure documents and other instruments will require substantial management time and attention and substantial costs for accountants, attorneys and others. If a decision is made not to complete a specific acquisition transaction, the costs incurred up to that point for the proposed transaction likely would not be recoverable. Furthermore, even if an agreement is reached relating to a specific target institution, we may fail to consummate the transaction for any number of reasons, including those beyond our control. Any such event will result in a loss to us of the related costs incurred, which could materially and adversely affect subsequent attempts to locate and acquire or merge with another institution.
We may be adversely affected by the soundness of other financial institutions.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty, and other relationships. We have exposure to different industries and counterparties, and through transactions with counterparties in the financial services industry, including broker-dealers, commercial banks, investment banks, and other financial intermediaries. Further, our private banking channel relies on relationships with a number of other financial institutions for referrals. As a result, declines in the financial condition of, or even rumors or questions about, one or more financial institutions, financial service companies or the financial services industry generally, may lead to market-wide liquidity, asset quality or other problems and could lead to losses or defaults by us or by other institutions. These problems, losses or defaults could have a material adverse effect on our business, financial condition, results of operations and future prospects.
We rely on third parties to provide key components of our business infrastructure, and failure of these parties to perform for any reason could disrupt our operations.
Our business depends on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party servicers. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If significant, sustained or repeated, a system failure or service denial could compromise our ability to operate effectively, damage our reputation, result in a loss of customer business, and subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our business, financial condition, results of operations and prospects.
We may incur impairment to goodwill.
We test our goodwill for impairment at least annually. Significant negative industry or economic trends, reduced estimates of future cash flows or disruptions to our business, could indicate that goodwill might be impaired. Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely on projections of future operating performance. Projections of future operating results and cash flows may vary significantly from actual results. Additionally, if our analysis results in impairment to our goodwill, we would be required to record a non-
27
cash charge to earnings in our financial statements during the period in which such impairment is determined to exist. Any such charge could have a material adverse effect on our results of operations.
Item 1B.
Unresolved Staff Comments
28
Item 2.
Properties
The Bank’s main office is located at 208 Elm Street in New Canaan, Connecticut. The property is leased by us until 2021, with two remaining five-year renewal options.the end of 2021. In July 2012, we initially leased additional space adjacent to 208 Elm Street at 220 Elm Street primarily for our executive management offices. The property located at 220 Elm Street was purchased by the Bank in December of 2016. Recently, the Bank entered into a 10-year lease for its future headquarters building located at 258 Elm Street in New Canaan, Connecticut. The Bank plans to relocate many of its non-branch employees to 258 Elm Street and, as a result, the Bank will sub-lease or sell some of its facilities that previously housed these employees.
We also lease office space for each of our branch offices in New Canaan, Stamford, Norwalk, Fairfield, Darien, and North HavenWestport, Connecticut. The leases for our facilities have terms expiring at dates ranging from 20182021 to 2029,2030, although certain of the leases contain options to extend beyond these dates. We own the Wilton and Hamden branch offices. We believe that our current facilities are adequate for our current level of operations. Each lease is at market rate based on similar properties in the applicable market area. We believe that we haveManagement continually evaluates its branch and other office locations for opportunities to maximize cost savings while meeting our growth needs and the necessary infrastructure in place to supportneeds of our projected growth.
Our branch officesoffice locations are located as follows:
| Branch | Address | Owned or Leased | |||||||||||||||
| Elm Street | 208 Elm Street New Canaan, CT 06840 | Lease (expires 2021) | |||||||||||||||
| Cherry Street | 156 Cherry Street New Canaan, CT 06840 | Lease (expires 2021) | |||||||||||||||
| 612 Bedford Street Stamford, CT 06901 | |||||||||||||||||
| High Ridge | 1095 High Ridge Road Stamford, CT 06905 | Lease (expires | |||||||||||||||
| Black Rock | 2220 Black Rock Turnpike Fairfield, CT 06825 | Lease (expires 2024) | |||||||||||||||
| Sasco Hill | One Sasco Hill Road Fairfield, CT 06824 | ||||||||||||||||
| Lease (expires 2024) | |||||||||||||||||
| Wilton | 47 Old Ridgefield Road Wilton, CT 06897 | Own | |||||||||||||||
| Norwalk | 370 Westport Avenue Norwalk, CT 06851 | Lease (expires | |||||||||||||||
| Hamden | 2704 Dixwell Avenue Hamden, CT 06518 | Own | |||||||||||||||
| Lease (expires 2028) | |||||||||||||||||
| Darien | 1065 Post Road Darien, CT | ||||||||||||||||
Item 3.
Legal Proceedings
From time to time we are a party to various litigation matters incidental to the conduct of our business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, future prospects, financial condition, liquidity, results of operation, cash flows or capital levels.
Item 4.
Mine Safety Disclosures
Not applicable.
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PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s Common Stock has traded on the NASDAQ Global Market under the Symbol “BWFG” since the completion of its initial public offering on May 15, 2014.
| | | | 2017 | | | 2016 | | ||||||||||||||||||||||||||||||
| | | | Sales Price | | | Cash Dividends Declared | | | Sales Price | | | Cash Dividends Declared | | ||||||||||||||||||||||||
| | | | High | | | Low | | | High | | | Low | | ||||||||||||||||||||||||
| Quarter Ended | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||
| March 31 | | | | $ | 35.00 | | | | | $ | 28.79 | | | | | $ | 0.07 | | | | | $ | 20.00 | | | | | $ | 18.48 | | | | | $ | 0.05 | | |
| June 30 | | | | | 38.50 | | | | | | 29.90 | | | | | | 0.07 | | | | | | 24.85 | | | | | | 19.60 | | | | | | 0.05 | | |
| September 30 | | | | | 37.00 | | | | | | 30.92 | | | | | | 0.07 | | | | | | 23.74 | | | | | | 21.61 | | | | | | 0.05 | | |
| December 31 | | | | | 37.95 | | | | | | 32.15 | | | | | | 0.07 | | | | | | 34.80 | | | | | | 23.00 | | | | | | 0.07 | | |
There were approximately 329266 shareholders of record of BWFG Common Stock as of December 31, 2017.2020. This number does not reflect the number of persons or entities holding stock in nominee name through banks, brokerage firms or other nominees.
The Company’s shareholders are entitled to dividends when and if declared by the boardBoard of directors,Directors, out of funds legally available. The ability of the Company to pay dividends depends, in part, on the ability of the Bank to pay dividends to the Company. In accordance with Connecticut statutes, regulatory approval is required for the Bank to pay dividends in excess of the Bank’s profits retained in the current year plus retained profits from the previous two years. The Bank is also prohibited from paying dividends that would reduce its capital ratios below minimum regulatory requirements.
Issuer Purchases of Equity Securities
The following table includes information with respect to repurchases of the Company’s Common Stock Performance Graph
| Issuer Purchases of Equity Securities | ||||||||||||||||||||||||||
| Period | Total Number of Shares (or Units) Purchased | Average Price Paid per Share (or Unit) | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs(1) | ||||||||||||||||||||||
| October 1, 2020 - October 31, 2020 | — | $ | — | — | 307,333 | |||||||||||||||||||||
| November 1, 2020 - November 30, 2020 | — | — | — | 307,333 | ||||||||||||||||||||||
| December 1, 2020 - December 31, 2020 | — | — | — | 307,333 | ||||||||||||||||||||||
| Total | — | $ | — | — | 307,333 | |||||||||||||||||||||
(1) On December 19, 2018, the IPO dateCompany’s Board of Directors authorized a share repurchase program of up to the cumulative return400,000 shares of the NASDAQ Composite IndexCompany’s Common Stock. The Company may repurchase shares in open market transactions or by other means, such as privately negotiated transactions. The timing, price and the NASDAQ Bank Index. Cumulative return assumes the reinvestmentvolume of dividends, and is expressed in dollarsrepurchases will be based on an assumed investmentmarket conditions, relevant securities laws and other factors. The share repurchase plan does not obligate the Company to acquire any particular amount of $100.
| Index | | | 05/15/14 | | | 12/31/14 | | | 12/31/15 | | | 12/31/16 | | | 12/31/17 | | |||||||||||||||
| Bankwell Financial Group, Inc. | | | | | 100.00 | | | | | | 116.67 | | | | | | 110.28 | | | | | | 180.56 | | | | | | 190.78 | | |
| Nasdaq Composite Index | | | | | 100.00 | | | | | | 116.39 | | | | | | 123.05 | | | | | | 132.29 | | | | | | 169.65 | | |
| Nasdaq Bank Index | | | | | 100.00 | | | | | | 109.89 | | | | | | 117.17 | | | | | | 158.21 | | | | | | 163.76 | | |
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Item 6.
Selected Financial Data
Selected Financial Data
The following table sets forth selected consolidated financial data as of the dates and for the periods presented. The selected consolidated balance sheet data as of December 31, 2020 and 2019 and the selected consolidated statement of income data for the years ended December 31, 2020, 2019 and 2018 have been derived mainly from our audited consolidated financial statements and related notes that we have included elsewhere in this Annual Report. The selected consolidated balance sheet data as of December 31, 2018, 2017 and 2016 and the selected consolidated statement of income data for the years ended December 31, 2017 and 2016 has been derived mainly from audited consolidated financial statements that are not presented in this Annual Report.
The selected historical consolidated financial data as of any date and for any period are not necessarily indicative of the results that may be achieved as of any future date or for any future period. You should read the following selected statistical and financial data in conjunction with the more detailed information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes that we have presented elsewhere in this Annual Report.
Performance ratios for the year ended December 31, 2020 were negatively impacted by incremental COVID-19 pandemic related loan loss reserves and a $3.9 million one-time charge related to office consolidation, vendor contract termination and employee severance costs recognized in the fourth quarter of 2020.
31
Selected Financial Data
| At or For the Years Ended December 31, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||
| (Dollars in thousands, except per share data) | |||||||||||||||||||||||||||||
| Statements of Income: | |||||||||||||||||||||||||||||
| Interest income | $ | 77,487 | $ | 82,948 | $ | 80,064 | $ | 71,201 | $ | 60,990 | |||||||||||||||||||
| Interest expense | 22,652 | 29,187 | 23,738 | 16,837 | 11,898 | ||||||||||||||||||||||||
| Net interest income | 54,835 | 53,761 | 56,326 | 54,364 | 49,092 | ||||||||||||||||||||||||
| Provision for loan losses | 7,605 | 437 | 3,440 | 1,341 | 3,914 | ||||||||||||||||||||||||
| Net interest income after provision for loan losses | 47,230 | 53,324 | 52,886 | 53,023 | 45,178 | ||||||||||||||||||||||||
| Noninterest income | 2,884 | 5,244 | 3,900 | 4,629 | 2,676 | ||||||||||||||||||||||||
| Noninterest expense | 42,813 | 35,626 | 35,633 | 32,523 | 29,544 | ||||||||||||||||||||||||
| Income before income tax | 7,301 | 22,942 | 21,153 | 25,129 | 18,310 | ||||||||||||||||||||||||
| Income tax expense | 1,397 | 4,726 | 3,720 | 11,299 | 5,960 | ||||||||||||||||||||||||
| Net income | 5,904 | 18,216 | 17,433 | 13,830 | 12,350 | ||||||||||||||||||||||||
| Per Share Data: | |||||||||||||||||||||||||||||
| Basic earnings per share | $ | 0.75 | $ | 2.32 | $ | 2.23 | $ | 1.80 | $ | 1.64 | |||||||||||||||||||
| Diluted earnings per share | $ | 0.75 | $ | 2.31 | $ | 2.21 | $ | 1.78 | $ | 1.62 | |||||||||||||||||||
Book value per share (end of period)(a) | 22.77 | 23.51 | 22.43 | 20.98 | 19.39 | ||||||||||||||||||||||||
Tangible book value per share (end of period)(a)(b) | 22.43 | 23.15 | 22.06 | 20.59 | 18.98 | ||||||||||||||||||||||||
Dividend payout ratio(f) | 74.67 | % | 22.51 | % | 21.72 | % | 15.73 | % | 13.58 | % | |||||||||||||||||||
Shares outstanding (end of period)(a) | 7,755,909 | 7,757,828 | 7,764,647 | 7,676,238 | 7,524,069 | ||||||||||||||||||||||||
| Weighted average shares outstanding–basic | 7,728,328 | 7,757,355 | 7,722,175 | 7,572,409 | 7,396,019 | ||||||||||||||||||||||||
| Weighted average shares outstanding–diluted | 7,748,453 | 7,784,631 | 7,775,480 | 7,670,413 | 7,491,052 | ||||||||||||||||||||||||
| Performance Ratios: | |||||||||||||||||||||||||||||
Return on average assets(c) | 0.28 | % | 0.97 | % | 0.94 | % | 0.80 | % | 0.85 | % | |||||||||||||||||||
| Return on average common shareholders’ equity | 3.35 | % | 10.20 | % | 10.19 | % | 8.93 | % | 8.94 | % | |||||||||||||||||||
| Average shareholders’ equity to average assets | 8.36 | % | 9.53 | % | 9.24 | % | 8.97 | % | 9.47 | % | |||||||||||||||||||
| Net interest margin | 2.77 | % | 3.03 | % | 3.18 | % | 3.30 | % | 3.54 | % | |||||||||||||||||||
Efficiency ratio(b) | 73.9 | % | 60.2 | % | 59.2 | % | 54.9 | % | 56.5 | % | |||||||||||||||||||
| Asset Quality Ratios: | |||||||||||||||||||||||||||||
Total past due loans to total loans(d) | 0.93 | % | 0.77 | % | 0.78 | % | 1.67 | % | 0.47 | % | |||||||||||||||||||
Nonperforming loans to total loans(d) | 2.06 | % | 0.66 | % | 0.88 | % | 0.36 | % | 0.22 | % | |||||||||||||||||||
Nonperforming assets to total assets(e) | 1.48 | % | 0.56 | % | 0.75 | % | 0.31 | % | 0.20 | % | |||||||||||||||||||
| Allowance for loan losses to nonperforming loans | 62.87 | % | 127.59 | % | 109.80 | % | 344.90 | % | 612.26 | % | |||||||||||||||||||
Allowance for loan losses to total loans(d) | 1.29 | % | 0.84 | % | 0.96 | % | 1.23 | % | 1.32 | % | |||||||||||||||||||
Net charge-offs (recoveries) to average loans(d) | 0.01 | % | 0.15 | % | 0.44 | % | 0.03 | % | 0.01 | % | |||||||||||||||||||
| Statements of Financial Condition: | |||||||||||||||||||||||||||||
| Total assets | $ | 2,253,747 | $ | 1,882,182 | $ | 1,873,665 | $ | 1,796,607 | $ | 1,628,919 | |||||||||||||||||||
Gross portfolio loans(d) | 1,625,627 | 1,604,484 | 1,604,726 | 1,543,016 | 1,365,939 | ||||||||||||||||||||||||
| Investment securities | 106,890 | 100,865 | 116,584 | 113,767 | 104,610 | ||||||||||||||||||||||||
| Deposits | 1,827,316 | 1,491,903 | 1,502,244 | 1,398,405 | 1,289,037 | ||||||||||||||||||||||||
| FHLB borrowings | 175,000 | 150,000 | 160,000 | 199,000 | 160,000 | ||||||||||||||||||||||||
| Subordinated debt | 25,258 | 25,207 | 25,155 | 25,103 | 25,051 | ||||||||||||||||||||||||
| Total equity | 176,602 | 182,397 | 174,196 | 161,027 | 145,895 | ||||||||||||||||||||||||
| Capital Ratios: | |||||||||||||||||||||||||||||
| Tier 1 capital to average assets | |||||||||||||||||||||||||||||
| Bankwell Bank | 8.44 | % | 10.99 | % | 10.14 | % | 9.61 | % | 10.10 | % | |||||||||||||||||||
| Tier 1 capital to risk-weighted assets | |||||||||||||||||||||||||||||
| Bankwell Bank | 11.06 | % | 12.53 | % | 11.56 | % | 10.99 | % | 11.59 | % | |||||||||||||||||||
| Total capital to risk-weighted assets | |||||||||||||||||||||||||||||
| Bankwell Bank | 12.28 | % | 13.35 | % | 12.50 | % | 12.19 | % | 12.85 | % | |||||||||||||||||||
| Total shareholders’ equity to total assets | 7.84 | % | 9.69 | % | 9.30 | % | 8.96 | % | 8.96 | % | |||||||||||||||||||
Tangible common equity ratio(b) | 7.73 | % | 9.56 | % | 9.16 | % | 8.81 | % | 8.78 | % | |||||||||||||||||||
| | | | At or For the Years Ended December 31, | | |||||||||||||||||||||||||||
| | | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | |||||||||||||||
| | | | (Dollars in thousands, except per share data) | | |||||||||||||||||||||||||||
| Statements of Income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | | $ | 71,201 | | | | | $ | 60,990 | | | | | $ | 50,754 | | | | | $ | 35,589 | | | | | $ | 28,092 | | |
| Interest expense | | | | | 16,837 | | | | | | 11,898 | | | | | | 7,966 | | | | | | 3,929 | | | | | | 2,765 | | |
| Net interest income | | | | | 54,364 | | | | | | 49,092 | | | | | | 42,788 | | | | | | 31,660 | | | | | | 25,327 | | |
| Provision for loan losses | | | | | 1,341 | | | | | | 3,914 | | | | | | 3,230 | | | | �� | | 2,152 | | | | | | 585 | | |
| Net interest income after provision for loan losses | | | | | 53,023 | | | | | | 45,178 | | | | | | 39,558 | | | | | | 29,508 | | | | | | 24,742 | | |
| Noninterest income | | | | | 4,629 | | | | | | 2,676 | | | | | | 3,484 | | | | | | 3,041 | | | | | | 4,723 | | |
| Noninterest expense | | | | | 32,523 | | | | | | 29,544 | | | | | | 29,171 | | | | | | 25,812 | | | | | | 22,120 | | |
| Income before income tax | | | | | 25,129 | | | | | | 18,310 | | | | | | 13,871 | | | | | | 6,737 | | | | | | 7,345 | | |
| Income tax expense | | | | | 11,299 | | | | | | 5,960 | | | | | | 4,841 | | | | | | 2,169 | | | | | | 2,184 | | |
| Net income | | | | | 13,830 | | | | | | 12,350 | | | | | | 9,030 | | | | | | 4,568 | | | | | | 5,161 | | |
| Net income attributable to common shareholders | | | | $ | 13,830 | | | | | $ | 12,350 | | | | | $ | 8,905 | | | | | $ | 4,458 | | | | | $ | 5,050 | | |
| Per Share Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic earnings per share | | | | $ | 1.80 | | | | | $ | 1.64 | | | | | $ | 1.23 | | | | | $ | 0.78 | | | | | $ | 1.46 | | |
| Diluted earnings per share | | | | | 1.78 | | | | | | 1.62 | | | | | | 1.21 | | | | | | 0.78 | | | | | | 1.44 | | |
Book value per share (end of period)(a) | | | | | 20.98 | | | | | | 19.39 | | | | | | 17.87 | | | | | | 16.84 | | | | | | 15.58 | | |
Tangible book value per share (end of period)(a)(b) | | | | | 20.59 | | | | | | 18.98 | | | | | | 17.43 | | | | | | 16.35 | | | | | | 15.46 | | |
Shares outstanding (end of period)(a) | | | | | 7,676,238 | | | | | | 7,524,069 | | | | | | 7,372,968 | | | | | | 7,019,620 | | | | | | 3,754,253 | | |
| Weighted average shares outstanding – basic | | | | | 7,572,409 | | | | | | 7,396,019 | | | | | | 7,071,550 | | | | | | 5,577,942 | | | | | | 3,395,779 | | |
| Weighted average shares outstanding – diluted | | | | | 7,670,413 | | | | | | 7,491,052 | | | | | | 7,140,558 | | | | | | 5,605,512 | | | | | | 3,451,393 | | |
| Performance Ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Return on average assets(c) | | | | | 0.80% | | | | | | 0.85% | | | | | | 0.75% | | | | | | 0.52% | | | | | | 0.77% | | |
| Return on average common shareholders’ equity | | | | | 8.93% | | | | | | 8.94% | | | | | | 6.67% | | | | | | 5.13% | | | | | | 9.68% | | |
Return on average shareholders’ equity(c) | | | | | 8.93% | | | | | | 8.94% | | | | | | 6.76% | | | | | | 4.66% | | | | | | 8.17% | | |
| Average shareholders’ equity to average assets | | | | | 8.97% | | | | | | 9.47% | | | | | | 11.08% | | | | | | 11.14% | | | | | | 9.32% | | |
| Net interest margin | | | | | 3.30% | | | | | | 3.54% | | | | | | 3.77% | | | | | | 3.84% | | | | | | 3.94% | | |
Efficiency ratio(b) | | | | | 54.9% | | | | | | 56.5% | | | | | | 62.3% | | | | | | 68.7% | | | | | | 75.7% | | |
| Asset Quality Ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total past due loans to total loans(d) | | | | | 1.67% | | | | | | 0.47% | | | | | | 0.51% | | | | | | 0.86% | | | | | | 0.73% | | |
Nonperforming loans to total loans(d) | | | | | 0.36% | | | | | | 0.22% | | | | | | 0.33% | | | | | | 0.36% | | | | | | 0.16% | | |
Nonperforming assets to total assets(e) | | | | | 0.31% | | | | | | 0.20% | | | | | | 0.38% | | | | | | 0.39% | | | | | | 0.23% | | |
| Allowance for loan losses to nonperforming loans | | | | | 344.90% | | | | | | 612.26% | | | | | | 373.76% | | | | | | 323.02% | | | | | | 835.69% | | |
Allowance for loan losses to total loans(d) | | | | | 1.23% | | | | | | 1.32% | | | | | | 1.23% | | | | | | 1.17% | | | | | | 1.33% | | |
Net charge-offs (recoveries) to average loans(d) | | | | | 0.03% | | | | | | 0.01% | | | | | | (0.01)% | | | | | | (0.05)% | | | | | | 0.03% | | |
| Statements of Financial Condition: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets | | | | $ | 1,796,607 | | | | | $ | 1,628,919 | | | | | $ | 1,330,372 | | | | | $ | 1,099,531 | | | | | $ | 779,618 | | |
Gross portfolio loans(d) | | | | | 1,543,016 | | | | | | 1,365,939 | | | | | | 1,147,513 | | | | | | 929,762 | | | | | | 632,012 | | |
| Investment securities | | | | | 113,767 | | | | | | 104,610 | | | | | | 50,807 | | | | | | 76,463 | | | | | | 42,413 | | |
| Deposits | | | | | 1,398,405 | | | | | | 1,289,037 | | | | | | 1,046,942 | | | | | | 835,439 | | | | | | 661,545 | | |
| FHLB borrowings | | | | | 199,000 | | | | | | 160,000 | | | | | | 120,000 | | | | | | 129,000 | | | | | | 44,000 | | |
| Subordinated debt | | | | | 25,103 | | | | | | 25,051 | | | | | | 25,000 | | | | | | — | | | | | | — | | |
| Total equity | | | | | 161,027 | | | | | | 145,895 | | | | | | 131,769 | | | | | | 129,210 | | | | | | 69,485 | | |
| Capital Ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tier 1 capital to average assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Bankwell Bank | | | | | 9.61% | | | | | | 10.10% | | | | | | 10.84% | | | | | | 11.12% | | | | | | 7.91% | | |
| Tier 1 capital to risk-weighted assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Bankwell Bank | | | | | 10.99% | | | | | | 11.59% | | | | | | 12.18% | | | | | | 12.47% | | | | | | 9.49% | | |
| Total capital to risk-weighted assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Bankwell Bank | | | | | 12.19% | | | | | | 12.85% | | | | | | 13.39% | | | | | | 13.55% | | | | | | 10.74% | | |
| Total shareholders’ equity to total assets | | | | | 8.96% | | | | | | 8.96% | | | | | | 9.90% | | | | | | 11.75% | | | | | | 8.91% | | |
Tangible common equity ratio(b) | | | | | 8.81% | | | | | | 8.78% | | | | | | 9.68% | | | | | | 10.47% | | | | | | 7.45% | | |
32
(a)Excludes preferred stock and unvested restricted stock awardsawards.
(b)
This measure is not a measure recognized under GAAP and is therefore considered to be a non-GAAP financial measure. See “Non-GAAP Financial Measures” for a description of this measure and a reconciliation of this measure to its most directly comparable GAAP measure.
(c)
Calculated based on net income before preferred stock dividendsdividend.
(d)
Calculated using the principal amounts outstanding on loansloans.
(e)
Nonperforming assets consist of nonperforming loans and other real estate ownedowned.
NON-GAAP FINANCIAL MEASURES
We identify “efficiency ratio”, “tangible common equity ratio”, “tangible book value per share”, “total revenue” and “return on average common shareholders’ equity” as “non-GAAP financial measures.” In accordance with the SEC’s rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles as in effect from time to time in the United States in our statements of income, balance sheet or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.
The non-GAAP financial measures that we discuss in this annual report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in this annual report may differ from that of other companies reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar or with names similar to the non-GAAP financial measures we have discussed in this annual report when comparing such non-GAAP financial measures.
Efficiency ratio is defined as non-interest expenses, less merger and acquisition related expenses, other real estate owned expenses and amortization of intangible assets, divided by our operating revenue, which is equal to net interest income plus non-interest income excluding gains and losses on sales of securities and gains and losses on other real estate owned and gain on bargain purchase.owned. In our judgment, the adjustments made to operating revenue allow investors and analysts to better assess our operating expenses in relation to our core operating revenue by removing the volatility that is associated with certain one-time items and other discrete items that are unrelated to our core business.
Tangible common equity is defined as total shareholders’ equity, excluding preferred stock, less goodwill and other intangible assets. We believe that this measure is important to many investors in the marketplace who are interested in changes from period to period in common shareholders’ equity exclusive of changes in intangible assets. Goodwill, an intangible asset that is recorded in a purchase business combination, has the effect of increasing both common equity and assets while not increasing our tangible common equity or tangible assets.
Tangible common equity ratio is defined as the ratio of tangible common equity divided by total assets less goodwill and other intangible assets. We believe that this measure is important to many investors in the marketplace who are interested in relative changes from period to period in common equity and total assets, each exclusive of changes in intangible assets. We believe that the most directly comparable GAAP financial measure is total shareholders’ equity to total assets.
Tangible book value per share is defined as book value, excluding the impact of goodwill and other intangible assets, if any, divided by shares of our common stock outstanding.
Total revenue is defined as the sum of net interest income before provision of loan losses and noninterest income.
Return on average common shareholders’ equity is defined as net income attributable to common shareholders divided by total average shareholders’ equity less average preferred stock.stock, if any.
The information provided below presents a reconciliation of each of our non-GAAP financial measures to the most directly comparable GAAP financial measure.
| | | | Years Ended December 31, | | |||||||||||||||
| | | | 2017 | | | 2016 | | | 2015 | | |||||||||
| Efficiency Ratio | | | | | | | | | | | | | | | | | | | |
| Noninterest expense | | | | $ | 32,523 | | | | | $ | 29,544 | | | | | $ | 29,171 | | |
| Less: foreclosed real estate expenses | | | | | 70 | | | | | | 157 | | | | | | 168 | | |
| Less: Amortization of Intangibles | | | | | 118 | | | | | | 151 | | | | | | 196 | | |
| Less: merger and acquisition expenses | | | | | — | | | | | | — | | | | | | 2 | | |
| Adjusted noninterest expense (numerator) | | | | $ | 32,335 | | | | | $ | 29,236 | | | | | $ | 28,805 | | |
| Net interest income | | | | $ | 54,364 | | | | | $ | 49,092 | | | | | $ | 42,788 | | |
| Noninterest income | | | | | 4,629 | | | | | | 2,676 | | | | | | 3,484 | | |
| Adjustments for: gains/(losses) on sales of securities | | | | | 165 | | | | | | (115) | | | | | | — | | |
| Adjustments for: (losses) gains on sale of foreclosed real estate | | | | | (78) | | | | | | 128 | | | | | | — | | |
| Adjusted operating revenue (denominator) | | | | $ | 58,906 | | | | | $ | 51,755 | | | | | $ | 46,272 | | |
| Efficiency ratio | | | | | 54.9% | | | | | | 56.5% | | | | | | 62.3% | | |
| Tangible Common Equity and Tangible Common Equity/Tangible Assets | | | | | | | | | | | | | | | | | | | |
| Total shareholders’ equity | | | | $ | 161,027 | | | | | $ | 145,895 | | | | | $ | 131,769 | | |
| Less: preferred stock | | | | | — | | | | | | — | | | | | | — | | |
| Common shareholders’ equity | | | | | 161,027 | | | | | | 145,895 | | | | | | 131,769 | | |
| Less: Intangible assets | | | | | 2,971 | | | | | | 3,090 | | | | | | 3,241 | | |
| Tangible Common shareholders’ equity | | | | $ | 158,056 | | | | | $ | 142,805 | | | | | $ | 128,528 | | |
| Total assets | | | | $ | 1,796,607 | | | | | $ | 1,628,919 | | | | | $ | 1,330,372 | | |
| Less: Intangible assets | | | | | 2,971 | | | | | | 3,090 | | | | | | 3,241 | | |
| Tangible assets | | | | $ | 1,793,636 | | | | | $ | 1,625,829 | | | | | $ | 1,327,131 | | |
| Tangible common shareholders’ equity to tangible assets | | | | | 8.81% | | | | | | 8.78% | | | | | | 9.68% | | |
| Tangible Book Value per Share | | | | | | | | | | | | | | | | | | | |
| Total shareholders’ equity | | | | $ | 161,027 | | | | | $ | 145,895 | | | | | $ | 131,769 | | |
| Less: preferred stock | | | | | — | | | | | | — | | | | | | — | | |
| Common shareholders’ equity | | | | | 161,027 | | | | | | 145,895 | | | | | | 131,769 | | |
| Less: Intangible assets | | | | | 2,971 | | | | | | 3,090 | | | | | | 3,241 | | |
| Tangible common shareholders’ equity | | | | $ | 158,056 | | | | | $ | 142,805 | | | | | $ | 128,528 | | |
| Common shares issued | | | | | 7,751,424 | | | | | | 7,620,663 | | | | | | 7,516,291 | | |
| Less: shares of unvested restricted stock | | | | | 75,186 | | | | | | 96,594 | | | | | | 143,323 | | |
| Common shares outstanding | | | | | 7,676,238 | | | | | | 7,524,069 | | | | | | 7,372,968 | | |
| Book value per share | | | | $ | 20.98 | | | | | $ | 19.39 | | | | | $ | 17.87 | | |
| Less: effects of intangible assets | | | | | 0.39 | | | | | | 0.41 | | | | | | 0.44 | | |
| Tangible Book Value per Common Share | | | | $ | 20.59 | | | | | $ | 18.98 | | | | | $ | 17.43 | | |
| Total Revenue | | | | | | | | | | | | | | | | | | | |
| Net Interest income | | | | $ | 54,364 | | | | | $ | 49,092 | | | | | $ | 42,788 | | |
| Add: noninterest income | | | | | 4,629 | | | | | | 2,676 | | | | | | 3,484 | | |
| Total Revenue | | | | $ | 58,993 | | | | | $ | 51,768 | | | | | $ | 46,272 | | |
| Noninterest income as a percentage of total revenue | | | | | 7.85% | | | | | | 5.17% | | | | | | 7.53% | | |
| Return on Average Common Shareholders’ Equity | | | | | | | | | | | | | | | | | | | |
| Net Income Attributable to Common Shareholders | | | | $ | 13,830 | | | | | $ | 12,350 | | | | | $ | 8,905 | | |
| Total average shareholders’ equity | | | | $ | 154,929 | | | | | $ | 138,131 | | | | | $ | 133,553 | | |
| Less: average preferred stock | | | | | — | | | | | | — | | | | | | — | | |
| Average common shareholders’ equity | | | | $ | 154,929 | | | | | $ | 138,131 | | | | | $ | 133,553 | | |
| Return on Average Common Shareholders’ Equity | | | | | 8.93% | | | | | | 8.94% | | | | | | 6.67% | | |
| | |||||||||||||||||||
33
| Years Ended December 31, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||
| (Dollars in thousands, except per share data) | |||||||||||||||||||||||||||||
| Efficiency Ratio | |||||||||||||||||||||||||||||
| Noninterest expense | $ | 42,813 | $ | 35,626 | $ | 35,633 | $ | 32,523 | $ | 29,544 | |||||||||||||||||||
| Less: other real estate owned expenses | 6 | 37 | — | 70 | 157 | ||||||||||||||||||||||||
| Less: Amortization of intangibles | 138 | 75 | 92 | 118 | 151 | ||||||||||||||||||||||||
| Adjusted noninterest expense (numerator) | $ | 42,669 | $ | 35,514 | $ | 35,541 | $ | 32,335 | $ | 29,236 | |||||||||||||||||||
| Net interest income | $ | 54,835 | $ | 53,761 | $ | 56,326 | $ | 54,364 | $ | 49,092 | |||||||||||||||||||
| Noninterest income | 2,884 | 5,244 | 3,900 | 4,629 | 2,676 | ||||||||||||||||||||||||
| Adjustments for: gains/(losses) on sales of securities | — | 76 | 222 | 165 | (115) | ||||||||||||||||||||||||
| Adjustments for: gains (losses) on sale of other real estate owned | 19 | (102) | — | (78) | 128 | ||||||||||||||||||||||||
| Adjusted operating revenue (denominator) | $ | 57,700 | $ | 59,031 | $ | 60,004 | $ | 58,906 | $ | 51,755 | |||||||||||||||||||
| Efficiency ratio | 73.9 | % | 60.2 | % | 59.2 | % | 54.9 | % | 56.5 | % | |||||||||||||||||||
| Tangible Common Equity and Tangible Common Equity/Tangible Assets | |||||||||||||||||||||||||||||
| Total shareholders’ equity | $ | 176,602 | $ | 182,397 | $ | 174,196 | $ | 161,027 | $ | 145,895 | |||||||||||||||||||
| Less: preferred stock | — | — | — | — | — | ||||||||||||||||||||||||
| Common shareholders’ equity | 176,602 | 182,397 | 174,196 | 161,027 | 145,895 | ||||||||||||||||||||||||
| Less: Intangible assets | 2,665 | 2,803 | 2,879 | 2,971 | 3,090 | ||||||||||||||||||||||||
| Tangible Common shareholders’ equity | $ | 173,937 | $ | 179,594 | $ | 171,317 | $ | 158,056 | $ | 142,805 | |||||||||||||||||||
| Total assets | $ | 2,253,747 | $ | 1,882,182 | $ | 1,873,665 | $ | 1,796,607 | $ | 1,628,919 | |||||||||||||||||||
| Less: Intangible assets | 2,665 | 2,803 | 2,879 | 2,971 | 3,090 | ||||||||||||||||||||||||
| Tangible assets | $ | 2,251,082 | $ | 1,879,379 | $ | 1,870,786 | $ | 1,793,636 | $ | 1,625,829 | |||||||||||||||||||
| Tangible common shareholders’ equity to tangible assets | 7.73 | % | 9.56 | % | 9.16 | % | 8.81 | % | 8.78 | % | |||||||||||||||||||
| Tangible Book Value per Share | |||||||||||||||||||||||||||||
| Total shareholders’ equity | $ | 176,602 | $ | 182,397 | $ | 174,196 | $ | 161,027 | $ | 145,895 | |||||||||||||||||||
| Less: preferred stock | — | — | — | — | — | ||||||||||||||||||||||||
| Common shareholders’ equity | 176,602 | 182,397 | 174,196 | 161,027 | 145,895 | ||||||||||||||||||||||||
| Less: Intangible assets | 2,665 | 2,803 | 2,879 | 2,971 | 3,090 | ||||||||||||||||||||||||
| Tangible common shareholders’ equity | $ | 173,937 | $ | 179,594 | $ | 171,317 | $ | 158,056 | $ | 142,805 | |||||||||||||||||||
| Common shares issued | 7,919,278 | 7,868,803 | 7,842,271 | 7,751,424 | 7,620,663 | ||||||||||||||||||||||||
| Less: shares of unvested restricted stock | 163,369 | 110,975 | 77,624 | 75,186 | 96,594 | ||||||||||||||||||||||||
| Common shares outstanding | 7,755,909 | 7,757,828 | 7,764,647 | 7,676,238 | 7,524,069 | ||||||||||||||||||||||||
| Book value per share | $ | 22.77 | $ | 23.51 | $ | 22.43 | $ | 20.98 | $ | 19.39 | |||||||||||||||||||
| Less: effects of intangible assets | 0.34 | 0.36 | 0.37 | 0.39 | 0.41 | ||||||||||||||||||||||||
| Tangible Book Value per Common Share | $ | 22.43 | $ | 23.15 | $ | 22.06 | $ | 20.59 | $ | 18.98 | |||||||||||||||||||
| Total Revenue | |||||||||||||||||||||||||||||
| Net interest income | $ | 54,835 | $ | 53,761 | $ | 56,326 | $ | 54,364 | $ | 49,092 | |||||||||||||||||||
| Add: noninterest income | 2,884 | 5,244 | 3,900 | 4,629 | 2,676 | ||||||||||||||||||||||||
| Total Revenue | $ | 57,719 | $ | 59,005 | $ | 60,226 | $ | 58,993 | $ | 51,768 | |||||||||||||||||||
| Noninterest income as a percentage of total revenue | 5.00 | % | 8.89 | % | 6.48 | % | 7.85 | % | 5.17 | % | |||||||||||||||||||
| Return on Average Common Shareholders’ Equity | |||||||||||||||||||||||||||||
| Net Income Attributable to Common Shareholders | $ | 5,904 | $ | 18,216 | $ | 17,433 | $ | 13,830 | $ | 12,350 | |||||||||||||||||||
| Total average shareholders’ equity | $ | 176,489 | $ | 178,510 | $ | 171,024 | $ | 154,929 | $ | 138,131 | |||||||||||||||||||
| Less: average preferred stock | — | — | — | — | — | ||||||||||||||||||||||||
| Average Common Shareholders’ Equity | 176,489 | 178,510 | 171,024 | 154,929 | 138,131 | ||||||||||||||||||||||||
| Return on Average Common Shareholders’ Equity | 3.35 | % | 10.20 | % | 10.19 | % | 8.93 | % | 8.94 | % | |||||||||||||||||||
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section presents management’s perspective on our financial condition and results of operations. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes contained elsewhere in this annual report. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of future financial outcomes. In addition to historical information, this discussion contains forward looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors”. We assume no obligation to update any of these forward-looking statements.
General
Bankwell Financial Group, Inc. (the "Parent Corporation") is a bank holding company headquartered in New Canaan, Connecticut. Through our wholly ownedThe Parent Corporation offers a broad range of financial services through its banking subsidiary, Bankwell Bank (the "Bank" and, collectively with the Parent Corporation and the Parent Corporation's subsidiaries, "we", "our", "us", or the "Company").
The Bank we serve smallis 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 medium-sized businesses and retailconsumer customers, primarily concentrated in the New York metropolitan area and throughout Connecticut, with the majority of ourthe Company's loans in Fairfield and New Haven Counties, Connecticut. We have a history of building long-term customer relationshipsConnecticut, with branch locations in New Canaan, Stamford, Fairfield, Wilton, Westport, Darien, Norwalk, and attracting new customers through what we believe is our strong customer service and our ability to deliver a diverse product offering.Hamden, Connecticut.
The following discussion and analysis presents our results of operations and financial condition on a consolidated basis. However, because we conduct all of our material business operations through the Bank, the discussion and analysis relates to activities primarily conducted at the Bank.
We generate most of our revenue from interest on loans and investments and fee-based revenues. Our primary source of funding for our loans is deposits. 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 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.
Executive Overview
We are focused on being the “Hometown” bank and the banking provider of choice in our highly attractive market area, and to serve as a locally based alternative to our larger competitors. We aim to do this through:
•
Responsive, customer-centric products and services and a community focus;
•
Utilization of efficient and scalable infrastructure; and
•
Disciplined focus on risk management.
The primary measures we use to evaluate and manage our financial results are set forth in the table below. Although we believe these measures are meaningful in evaluating our results and financial condition, they may not be directly comparable to similar measures used by other financial services companies and may not provide an appropriate basis to compare our results or financial condition to the results or financial condition of our competitors. The following table sets forth the key financial measures we use to evaluate the success of our business and our financial position and operating performance.
35
Key Financial Measures
| | | Key Financial Measures(a) | | |||||||||||||||||||||||||||||||||
| | | At or For the Years Ended December 31, | | |||||||||||||||||||||||||||||||||
| | | 2017 | | 2016 | | 2015 | | |||||||||||||||||||||||||||||
| | | (Dollars in thousands, except per share data) | | |||||||||||||||||||||||||||||||||
Key Financial Measures(a) | ||||||||||||||||||||||||||||||||||||
| At or For the Years Ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands, except per share data) | ||||||||||||||||||||||||||||||||||||
| Selected balance sheet measures: | | | | | | | | | | | | | | | | Selected balance sheet measures: | ||||||||||||||||||||
| Total assets | | ��� | $ | 1,796,607 | | | | $ | 1,628,919 | | | | $ | 1,330,372 | | Total assets | $ | 2,253,747 | $ | 1,882,182 | $ | 1,873,665 | ||||||||||||||
| Gross portfolio loans | | | | 1,543,016 | | | | | 1,365,939 | | | | | 1,147,513 | | Gross portfolio loans | 1,625,627 | 1,604,484 | 1,604,726 | |||||||||||||||||
| Deposits | | | | 1,398,405 | | | | | 1,289,037 | | | | | 1,046,942 | | Deposits | 1,827,316 | 1,491,903 | 1,502,244 | |||||||||||||||||
| FHLB borrowings | | | | 199,000 | | | | | 160,000 | | | | | 120,000 | | FHLB borrowings | 175,000 | 150,000 | 160,000 | |||||||||||||||||
| Subordinated debt | | | | 25,103 | | | | | 25,051 | | | | | 25,000 | | Subordinated debt | 25,258 | 25,207 | 25,155 | |||||||||||||||||
| Total equity | | | | 161,027 | | | | | 145,895 | | | | | 131,769 | | Total equity | 176,602 | 182,397 | 174,196 | |||||||||||||||||
| Selected statement of income measures: | | | | | | | | | | | | | | | | Selected statement of income measures: | ||||||||||||||||||||
Total revenue(c) | | | | 58,993 | | | | | 51,768 | | | | | 46,272 | | Total revenue(c) | 57,719 | 59,005 | 60,226 | |||||||||||||||||
| Net interest income before provision for loan losses | | | | 54,364 | | | | | 49,092 | | | | | 42,788 | | Net interest income before provision for loan losses | 54,835 | 53,761 | 56,326 | |||||||||||||||||
| Income before income tax expense | | | | 25,129 | | | | | 18,310 | | | | | 13,871 | | Income before income tax expense | 7,301 | 22,942 | 21,153 | |||||||||||||||||
| Net income | | | | 13,830 | | | | | 12,350 | | | | | 9,030 | | Net income | 5,904 | 18,216 | 17,433 | |||||||||||||||||
| Basic earnings per share | | | | 1.80 | | | | | 1.64 | | | | | 1.23 | | Basic earnings per share | $ | 0.75 | $ | 2.32 | $ | 2.23 | ||||||||||||||
| Diluted earnings per share | | | | 1.78 | | | | | 1.62 | | | | | 1.21 | | Diluted earnings per share | $ | 0.75 | $ | 2.31 | $ | 2.21 | ||||||||||||||
Key Financial Measures(a) | |||||||||||||||||
| At or For the Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Other financial measures and ratios: | |||||||||||||||||
| Return on average assets | 0.28 | % | 0.97 | % | 0.94 | % | |||||||||||
Return on average common shareholders’ equity(c) | 3.35 | % | 10.20 | % | 10.19 | % | |||||||||||
| Net interest margin | 2.77 | % | 3.03 | % | 3.18 | % | |||||||||||
Efficiency ratio(c) | 73.9 | % | 60.2 | % | 59.2 | % | |||||||||||
Tangible book value per share (end of period)(c)(d) | $ | 22.43 | $ | 23.15 | $ | 22.06 | |||||||||||
Net charge-offs to average loans(b) | 0.01 | % | 0.15 | % | 0.44 | % | |||||||||||
Nonperforming assets to total assets(e) | 1.48 | % | 0.56 | % | 0.75 | % | |||||||||||
| Allowance for loan losses to nonperforming loans | 62.87 | % | 127.59 | % | 109.80 | % | |||||||||||
Allowance for loan losses to total loans(b) | 1.29 | % | 0.84 | % | 0.96 | % | |||||||||||
| | | | Key Financial Measures(a) | | |||||||||||||||
| | | | At or For the Years Ended December 31, | | |||||||||||||||
| | | | 2017 | | | 2016 | | | 2015 | | |||||||||
| | | | (Dollars in thousands, except per share data) | | |||||||||||||||
| Other financial measures and ratios: | | | | | | | | | | | | | | | | | | | |
Return on average assets(d) | | | | | 0.80% | | | | | | 0.85% | | | | | | 0.75% | | |
Return on average common shareholders’ equity(c)(d) | | | | | 8.93% | | | | | | 8.94% | | | | | | 6.67% | | |
| Net interest margin | | | | | 3.30% | | | | | | 3.54% | | | | | | 3.77% | | |
Efficiency ratio(c) | | | | | 54.9% | | | | | | 56.5% | | | | | | 62.3% | | |
Tangible book value per share (end of period)(c)(e) | | | | $ | 20.59 | | | | | $ | 18.98 | | | | | $ | 17.43 | | |
Net charge-offs (recoveries) to average loans(b) | | | | | 0.03% | | | | | | 0.01% | | | | | | (0.01)% | | |
Nonperforming assets to total assets(f) | | | | | 0.31% | | | | | | 0.20% | | | | | | 0.38% | | |
| Allowance for loan losses to nonperforming loans | | | | | 344.90% | | | | | | 612.26% | | | | | | 373.76% | | |
Allowance for loan losses to total loans(b) | | | | | 1.23% | | | | | | 1.32% | | | | | | 1.23% | | |
(a)
We have derived the selected balance sheet measures as of December 31, 20172020 and 20162019 and the selected statement of income measures for the years ended December 31, 2017, 20162020, 2019 and 20152018 from our audited consolidated financial statements included elsewhere in this annual report. We have derived the selected balance sheet measures as of December 31, 2015 from our audited consolidated statement of financial condition not included in this annual report. Average balances have been computed using daily averages. Our historical results may not be indicative of our results for any future period.
(b)
Calculated using the principal amounts outstanding on loans.
(c)
This measure is not a measure recognized under GAAP and is therefore considered to be a non-GAAP financial measure. See “Non-GAAP Financial Measures” for a description of this measure and a reconciliation of this measure to its most directly comparable GAAP measure.
(d)
Excludes preferred stock and unvested restricted stock awards.
(e)Nonperforming assets consist of nonperforming loans and other real estate owned.
36
Critical Accounting Policies and Estimates
The discussion and analysis of our results of operations and financial condition are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires us to make significant estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. 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 initial measurement of the allowance for loan losses, stock-based compensation,the valuation of derivative instrument valuation,instruments, investment securities valuation,and deferred income taxes, and the evaluation of investment securities for other than temporary impairment and deferred income taxes valuation are particularly critical and susceptible to significant near-term change.
Allowance for Loan Losses
Determining an appropriate level of allowance for loan losses involves a high degree of judgment. We use a methodology to systematically measure the amount of estimated loan loss exposure inherent in the loan portfolio for purposes of establishing a sufficient allowance for loan losses. The methodology includes elements for specific reserves on impaired loans and loss allocations for non-impaired loans:loans.
Loss allocations are identified for individual loans deemed to be impaired in accordance with GAAP. Impaired loans are loans for which it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreements, including non-accrualnonaccrual loans and all loans restructured in a troubled debt restructuring. Impaired loans do not include large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, which consist of most residential mortgage loans, commercial real estate, commercial loans and consumer loans.impairment. Impairment is measured on a discounted cash flow method based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or if the loan is collateral dependent, at the fair value of the collateral less costs to sell. For collateral dependent loans, management may adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of circumstances associated with the property.
Loss allocations for non-impaired loans are determined by portfolio segment and are based on the Bank’s and peer banks’ historical loss experiences over an economic cycle adjusted for qualitative factors. Qualitative factors include, but are not limited to, lending policies and procedures, nature and volume of the portfolio, concentrations of credit, lending management and staff, volume and severity of problem loans, quality of review and rating systems, value of underlying collateral, current economic conditions, and competitive and regulatory issues. We analyze historical loss experience over periods deemed to be relevant to the inherent risk of loss in loan portfolios as of the balance sheet date. During 2017, we updated our allowance methodology and underlying loan loss assumptions, incorporating recent industry and product loss trends. This resulted in a non-recurring pretax $1.3 million reduction in the allowance and increase in earnings.
Loss allocations for non-impaired loans are based on an internal rating system and the application of loss allocation factors. The loan rating system is described under the caption “Credit quality indicators” in Note 65 of the Notes to Consolidated Financial Statements. The loan rating system and the related loss allocation factors take into consideration parameters including the borrower’s financial condition, the borrower’s performance with respect to loan terms, and the adequacy of collateral. The loss allocation factors also take into account general and regional economic statistics, trends, and portfolio characteristics such as the age of the portfolio and the Bank’s experience with a particular loan product. We periodically reassess and adjust the loss allocation factors used in the assignment of loss factors that we believe are not adequately presented in historical loss experience including trends in real estate values, changes in unemployment levels and increases in delinquency levels to appropriately reflect our analysis of migratory loss experience.
Because the methodology is partly based upon peer bank data and trends, current economic data as well as management’s judgment, factors may arise that result in different estimations. Adversely different conditions or assumptions could lead to increases in the allowance. In addition, various regulatory agencies periodically review the allowance for loans losses. Such agencies may require additions to the allowance based on their judgments about information available to them at the time of their examination. As of December 31, 2017,2020, management believes that the allowance is adequate and consistent with asset quality and delinquency indicators.
Derivative Instrument Valuation
The Company enters into interest rate swap agreements as part of the Company’s interest rate risk management strategy. Management applies the hedge accounting provisions of Accounting Standards Codification (“ASC”) Topic 815, and formally documents at inception all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking the various hedges. Additionally, the Company uses dollar offset or regression analysis at the hedge’s inception and for each reporting period thereafter, to assessassesses whether the derivative used in its hedging transaction is expected to be and has been highly effective in offsetting changes in the fair value or cash flows of the hedged item. The Company discontinues hedge accounting when it is determined that a derivative is not expected to be or has ceased to be highly effective as a hedge, and then reflects changes in fair value of the derivative in earnings after termination of the hedge relationship.
37
The Company has characterized all of its interest rate swaps that qualify under ASC Topic 815 hedge accounting as cash flow hedges. Cash flow hedges are used to minimize the variability in cash flows of assets or liabilities, or forecasted transactions caused by fluctuations in the contractually specified interest rate fluctuations,rates, and are recorded at fair value in other assets within the consolidated balance sheet. Changes in the fair value of these cash flow hedges are initially recorded in accumulated other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any
The Company also has derivatives not designated as hedges. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain loan customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge ineffectiveness assessed as partaccounting requirements, changes in the fair value of both the Company’s quarterly analysis is recordedcustomer derivatives and the offsetting derivatives are recognized directly toin earnings.
Investment Securities Valuation
Fair values of the Company’s investment securities are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. The Company’s private placement municipal housing authority bonds, classified as held
to maturity, have no available quoted market price. The fair value for these securities is estimated using a discounted cash flow model. Due to the judgments and uncertainties involved in the estimation process, the estimates could result in materially different results under different assumptions and conditions.
Evaluation of Investment Securities for Other Than Temporary Impairment
The Company evaluates investment securities within the Company’s available for sale and held to maturity portfolios for other-than-temporary impairment (“OTTI”), at least quarterly. If the fair value of a debt security is below the amortized cost basis of the security, OTTI is required to be recognized if any of the following are met: (1) the Company intends to sell the security; (2) it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired debt securities that are intended for sale, or more likely than not will be required to sell, the full amount of the loss is recognized as OTTI through earnings. Credit related OTTI for all other impaired debt securities is recognized through earnings. NoncreditNon-credit related OTTI for such debt securities is recognized in other comprehensive income, net of applicable taxes. Should actual factors and conditions differ materially from those expected by management, the actual realization of gains or losses on investment securities could differ materially from the amounts recorded in the financial statements.
Deferred Income Taxes
In accordance with ASC Topic 740, “Income Taxes,” certain aspects of accounting for income taxes require significant management judgment, including assessing the realizability of Deferred Tax Assets (DTAs). Such judgments are subjective and involve estimates and assumptions about matters that are inherently uncertain. Should actual factors and conditions differ materially from those used by management, the actual realization of DTAs could differ materially from the amounts recorded in the Consolidated Financial Statements and the accompanying Notes thereto.
DTAs generally represent items for which a benefit has been recognized for financial accounting purposes that cannot be realized for tax purposes until a future period. The realization of DTAs depends upon future sources of taxable income. Valuation allowances are established for those DTAs determined not likely to be realized based on management’s judgment.
Earnings and Performance Overview
Our net income for the year ended December 31, 20172020 was $13.8$5.9 million, an increasea decrease of $1.5$12.3 million, or 12.0%67.6%, compared to the year ended December 31, 2016. Net income available to common shareholders2019. Diluted earnings per share was $0.75 for the year ended December 31, 2017, was $13.8 million, or $1.78 per diluted share,2020, compared to net income available to common shareholdersdiluted earnings per share of $12.4 million, or $1.62 per diluted share,$2.31 for the year ended December 31, 2016.2019. Our returns on average shareholders' equity and average assets for the year ended December 31, 2017,2020, were 8.93%3.35% and 0.80%0.28%, respectively, compared to 8.94%10.20% and 0.85%0.97%, respectively for the year ended December 31, 2016.2019.
The increasedecrease in net income for 20172020 compared to 20162019 was primarilyimpacted 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. The
38
provision for loan losses totaled $7.6 million for the year ended December 31, 2020, consisting of interest and fees on loans as a resultCOVID-19 related reserves of strong organic loan growth. This increase was$9.0 million, partially offset by the $3.3 million write-off of the deferred tax asset as a result of the legislation enacted as part of the Tax Cutsdue to changes in portfolio mix and Jobs Act of 2017. growth.
Net interest income for the year ended December 31, 20172020 was $54.4$54.8 million, an increase of
2019 Earnings Overview
Reference the 2019 Form 10-K for discussion regarding financial performance and to attract additional deposits.
Results of Operations
Net Interest Income
Net interest income is the difference between interest earned on loans and securities and interest paid on deposits and other borrowings, and is the primary source of our operating income. Net interest income is affected by the level of interest rates, changes in interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. Included in interest income are certain loan fees, such as deferred origination fees and late charges. We convert tax-exempt income to a FTE basis using the statutory federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit. The average balances are principally daily averages. Interest income on loans includes the effect of deferred loan fees and costs accounted for as yield adjustments. Premium amortization and discount accretion are included in the respective interest income and interest expense amounts.
Year ended December 31, 20172020 compared to year ended December 31, 20162019
FTE net interest income for the years ended December 31, 20172020 and 20162019 was $55.0 million and $49.7$54.0 million, respectively. Net interest income increased due to increases in earning assets offset by higherlower rates and volume on interest bearing deposits driven by our continued earning asset growth.deposits.
FTE basis interest income for the year ended December 31, 2017 increased by $10.2 million to $71.82020 decreased $5.5 million, or 17%7%, to $77.7 million compared to FTE basis interest income for the year ended December 31, 20162019 due primarily to growthlower loan yields as loans were re-priced in the current low interest earning assets, specifically, loan growth in our commercial real estate and commercial business portfolios.rate environment. Average interest earning assets were $1.7$2.0 billion for the year ended December 31, 2017 up2020, increasing by $263.2$206.4 million, or 19%11.6%, from the year ended December 31, 2016.2019 due to an increase in cash and cash equivalents in part to maintain a higher level of liquidity during the COVID-19 pandemic. The average balance of total loans increased $209.8$43.7 million, or 17%, contributing $8.8 million to the increase in interest income.2.8%. The total average balance of securities for the year ended December 31, 2017 increased2020 decreased by
Interest expense for the year ended December 31, 2017, increased2020 decreased by $4.9$6.5 million, or 42%22%, compared to interest expense for 20162019 due to an increase in volume and increasesa decrease in rates on interest bearing deposits driven by promotional rate increases to remain competitive in the market place. The weighted average cost of deposits increased 20 basis points to 1.06% due to an increase in market rates and our desire to attract additional deposits. The weighted average cost of borrowed money decreased by 922 basis points to 2.10%2.31%. Average interest bearing liabilities for the year ended December 31, 2017,2020 increased by $258.8$177.3 million, or 23%12%, from the year ended December 31, 2016,2019, primarily due to higher average balances of $109.0 million in time deposits, $87.6 million in money market accounts and $30.4 million in borrowed money.
39
Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential
The following table below 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 yearyears ended December 31, 20172020, 2019 and 2016.
2018.| Years Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Average Balance | Interest | Yield/ Rate(5) | Average Balance | Interest | Yield/ Rate(5) | Average Balance | Interest | Yield/ Rate(5) | |||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash and fed funds sold | $ | 261,689 | $ | 585 | 0.22 | % | $ | 85,678 | $ | 1,859 | 2.17 | % | $ | 77,923 | $ | 1,428 | 1.84 | % | |||||||||||||||||||||||||||||||||||
Securities(1) | 98,938 | 3,103 | 3.14 | 112,336 | 3,526 | 3.14 | 118,311 | 3,686 | 3.12 | ||||||||||||||||||||||||||||||||||||||||||||
| Loans: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate | 1,095,367 | 51,218 | 4.60 | 1,067,290 | 50,818 | 4.70 | 1,014,255 | 47,967 | 4.66 | ||||||||||||||||||||||||||||||||||||||||||||
| Residential real estate | 129,585 | 4,645 | 3.58 | 165,384 | 6,367 | 3.85 | 189,121 | 7,016 | 3.71 | ||||||||||||||||||||||||||||||||||||||||||||
Construction(2) | 97,230 | 4,262 | 4.31 | 85,591 | 4,538 | 5.23 | 90,773 | 4,667 | 5.07 | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial business | 295,662 | 13,530 | 4.50 | 255,779 | 15,599 | 6.01 | 282,425 | 15,037 | 5.25 | ||||||||||||||||||||||||||||||||||||||||||||
| Consumer | 121 | 10 | 8.00 | 258 | 17 | 6.70 | 481 | 28 | 5.88 | ||||||||||||||||||||||||||||||||||||||||||||
| Total loans | 1,617,965 | 73,665 | 4.48 | 1,574,302 | 77,339 | 4.85 | 1,577,055 | 74,715 | 4.67 | ||||||||||||||||||||||||||||||||||||||||||||
| Federal Home Loan Bank stock | 7,625 | 346 | 4.53 | 7,502 | 473 | 6.31 | 9,177 | 517 | 5.63 | ||||||||||||||||||||||||||||||||||||||||||||
| Total earning assets | 1,986,217 | $ | 77,699 | 3.85 | % | 1,779,818 | $ | 83,197 | 4.61 | % | 1,782,466 | $ | 80,346 | 4.45 | % | ||||||||||||||||||||||||||||||||||||||
| Other assets | 125,261 | 92,663 | 68,002 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 2,111,478 | $ | 1,872,481 | $ | 1,850,468 | |||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities and shareholders’ equity: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest bearing liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| NOW | $ | 80,805 | $ | 141 | 0.17 | % | $ | 62,254 | $ | 128 | 0.21 | % | $ | 60,410 | $ | 157 | 0.26 | % | |||||||||||||||||||||||||||||||||||
| Money market | 516,527 | 4,071 | 0.79 | 439,867 | 7,139 | 1.62 | 482,886 | 6,431 | 1.33 | ||||||||||||||||||||||||||||||||||||||||||||
| Savings | 169,763 | 1,368 | 0.81 | 177,854 | 2,968 | 1.67 | 124,214 | 1,649 | 1.33 | ||||||||||||||||||||||||||||||||||||||||||||
| Time | 712,461 | 12,600 | 1.77 | 637,515 | 14,463 | 2.27 | 619,448 | 10,714 | 1.73 | ||||||||||||||||||||||||||||||||||||||||||||
| Total interest bearing deposits | 1,479,556 | 18,180 | 1.23 | 1,317,490 | 24,698 | 1.87 | 1,286,958 | 18,951 | 1.47 | ||||||||||||||||||||||||||||||||||||||||||||
| Borrowed money | 190,463 | 4,472 | 2.31 | 175,267 | 4,489 | 2.53 | 213,546 | 4,787 | 2.21 | ||||||||||||||||||||||||||||||||||||||||||||
| Total interest bearing liabilities | 1,670,019 | $ | 22,652 | 1.36 | % | 1,492,757 | $ | 29,187 | 1.96 | % | 1,500,504 | $ | 23,738 | 1.58 | % | ||||||||||||||||||||||||||||||||||||||
| Noninterest bearing deposits | 215,073 | 172,192 | 166,566 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other liabilities | 49,897 | 29,022 | 12,374 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities | 1,934,989 | 1,693,971 | 1,679,444 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shareholders’ equity | 176,489 | 178,510 | 171,024 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 2,111,478 | $ | 1,872,481 | $ | 1,850,468 | |||||||||||||||||||||||||||||||||||||||||||||||
Net interest income(3) | $ | 55,047 | $ | 54,010 | $ | 56,608 | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate spread | 2.49 | % | 2.65 | % | 2.87 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Net interest margin(4) | 2.77 | % | 3.03 | % | 3.18 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| | | | Years Ended December 31, | | |||||||||||||||||||||||||||||||||||||||||||||||||||
| | | | 2017 | | | 2016 | | | 2015 | | |||||||||||||||||||||||||||||||||||||||||||||
| | | | Average Balance | | | Interest | | | Yield/ Rate(5) | | | Average Balance | | | Interest | | | Yield/ Rate(5) | | | Average Balance | | | Interest | | | Yield/ Rate(5) | | |||||||||||||||||||||||||||
| | | | (Dollars in thousands) | | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and fed funds sold | | | | $ | 85,308 | | | | | $ | 790 | | | | | | 0.93% | | | | | $ | 41,838 | | | | | $ | 173 | | | | | | 0.41% | | | | | $ | 39,632 | | | | | $ | 98 | | | | | | 0.25% | | |
| Securities(1) | | | | | 108,775 | | | | | | 3,830 | | | | | | 3.52 | | | | | | 99,905 | | | | | | 3,046 | | | | | | 3.05 | | | | | | 59,009 | | | | | | 2,243 | | | | | | 3.80 | | |
| Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial real estate | | | | | 907,223 | | | | | | 41,638 | | | | | | 4.53 | | | | | | 772,890 | | | | | | 36,572 | | | | | | 4.65 | | | | | | 613,961 | | | | | | 30,058 | | | | | | 4.81 | | |
| Residential real estate | | | | | 180,287 | | | | | | 6,323 | | | | | | 3.51 | | | | | | 179,096 | | | | | | 6,410 | | | | | | 3.58 | | | | | | 174,527 | | | | | | 6,280 | | | | | | 3.60 | | |
Construction(2) | | | | | 107,752 | | | | | | 5,195 | | | | | | 4.75 | | | | | | 100,611 | | | | | | 4,602 | | | | | | 4.50 | | | | | | 76,292 | | | | | | 3,504 | | | | | | 4.53 | | |
| Commercial business | | | | | 253,868 | | | | | | 12,981 | | | | | | 5.04 | | | | | | 185,523 | | | | | | 9,791 | | | | | | 5.19 | | | | | | 156,039 | | | | | | 8,088 | | | | | | 5.11 | | |
| Home equity | | | | | 14,057 | | | | | | 660 | | | | | | 4.70 | | | | | | 14,951 | | | | | | 621 | | | | | | 4.16 | | | | | | 17,163 | | | | | | 648 | | | | | | 3.78 | | |
| Consumer | | | | | 1,227 | | | | | | 44 | | | | | | 3.62 | | | | | | 1,560 | | | | | | 81 | | | | | | 5.17 | | | | | | 2,350 | | | | | | 114 | | | | | | 4.85 | | |
| Total loans | | | | | 1,464,414 | | | | | | 66,841 | | | | | | 4.50 | | | | | | 1,254,631 | | | | | | 58,077 | | | | | | 4.55 | | | | | | 1,040,332 | | | | | | 48,692 | | | | | | 4.62 | | |
| Federal Home Loan Bank stock | | | | | 8,486 | | | | | | 337 | | | | | | 3.97 | | | | | | 7,366 | | | | | | 255 | | | | | | 3.46 | | | | | | 6,715 | | | | | | 168 | | | | | | 2.50 | | |
| Total earning assets | | | | | 1,666,983 | | | | | $ | 71,798 | | | | | | 4.25% | | | | | | 1,403,740 | | | | | $ | 61,551 | | | | | | 4.31% | | | | | | 1,145,688 | | | | | $ | 51,201 | | | | | | 4.41% | | |
| Other assets | | | | | 60,904 | | | | | | | | | | | | | | | | | | 54,580 | | | | | | | | | | | | | | | | | | 60,191 | | | | | | | | | | | | | | |
| Total assets | | | | $ | 1,727,887 | | | | | | | | | | | | | | | | | $ | 1,458,320 | | | | | | | | | | | | | | | | | $ | 1,205,879 | | | | | | | | | | | | | | |
| Liabilities and shareholders’ equity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest -bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| NOW | | | | $ | 57,712 | | | | | $ | 93 | | | | | | 0.16% | | | | | $ | 56,123 | | | | | $ | 109 | | | | | | 0.19% | | | | | $ | 55,696 | | | | | $ | 62 | | | | | | 0.11% | | |
| Money market | | | | | 404,848 | | | | | | 3,427 | | | | | | 0.85 | | | | | | 317,210 | | | | | | 1,836 | | | | | | 0.58 | | | | | | 263,900 | | | | | | 1,411 | | | | | | 0.53 | | |
| Savings | | | | | 102,915 | | | | | | 763 | | | | | | 0.74 | | | | | | 72,800 | | | | | | 315 | | | | | | 0.43 | | | | | | 96,841 | | | | | | 693 | | | | | | 0.72 | | |
| Time | | | | | 633,260 | | | | | | 8,411 | | | | | | 1.33 | | | | | | 524,237 | | | | | | 6,040 | | | | | | 1.15 | | | | | | 365,179 | | | | | | 3,515 | | | | | | 0.96 | | |
| Total interest-bearing deposits | | | | | 1,198,735 | | | | | | 12,694 | | | | | | 1.06 | | | | | | 970,370 | | | | | | 8,300 | | | | | | 0.86 | | | | | | 781,616 | | | | | | 5,681 | | | | | | 0.73 | | |
| Borrowed money | | | | | 194,875 | | | | | | 4,143 | | | | | | 2.10 | | | | | | 164,450 | | | | | | 3,598 | | | | | | 2.19 | | | | | | 129,390 | | | | | | 2,285 | | | | | | 1.77 | | |
| Total interest-bearing liabilities | | | | | 1,393,610 | | | | | $ | 16,837 | | | | | | 1.21% | | | | | | 1,134,820 | | | | | $ | 11,898 | | | | | | 1.05% | | | | | | 911,006 | | | | | $ | 7,966 | | | | | | 0.87% | | |
| Noninterest-bearing deposits | | | | | 169,250 | | | | | | | | | | | | | | | | | | 172,098 | | | | | | | | | | | | | | | | | | 154,950 | | | | | | | | | | | | | | |
| Other liabilities | | | | | 10,098 | | | | | | | | | | | | | | | | | | 13,271 | | | | | | | | | | | | | | | | | | 6,370 | | | | | | | | | | | | | | |
| Total liabilities | | | | | 1,572,958 | | | | | | | | | | | | | | | | | | 1,320,189 | | | | | | | | | | | | | | | | | | 1,072,326 | | | | | | | | | | | | | | |
| Shareholders’ equity | | | | | 154,929 | | | | | | | | | | | | | | | | | | 138,131 | | | | | | | | | | | | | | | | | | 133,553 | | | | | | | | | | | | | | |
| Total liabilities and shareholders’ equity | | | | $ | 1,727,887 | | | | | | | | | | | | | | | | | $ | 1,458,320 | | | | | | | | | | | | | | | | | $ | 1,205,879 | | | | | | | | | | | | | | |
Net interest income(3) | | | | | | | | | | $ | 54,961 | | | | | | | | | | | | | | | | | $ | 49,653 | | | | | | | | | | | | | | | | | $ | 43,235 | | | | | | | | |
| Interest rate spread | | | | | | | | | | | | | | | | | 3.04% | | | | | | | | | | | | | | | | | | 3.26% | | | | | | | | | | | | | | | | | | 3.54% | | |
Net interest margin(4) | | | | | | | | | | | | | | | | | 3.30% | | | | | | | | | | | | | | | | | | 3.54% | | | | | | | | | | | | | | | | | | 3.77% | | |
(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 $597$212 thousand, $561$249 thousand and $447$282 thousand, respectively, for the years ended December 31, 2017, 20162020, 2019 and 2015.2018. Tax exempt income was converted to a fully taxable equivalent basis at a 3020 percent tax rate for 2017, 20162020, 2019 and 2015.2018.
(4)
Net interest income as a percentage of total earning assets.
(5)
Yields are calculated using the contractual day count convention for each respective product type.
40
Effect of changes in interest rates and volume of average earning assets and average interest-bearing liabilities
The following table shows the extent to which changes in interest rates and changes in the volume of average earning assets and average interest-bearing liabilities have affected net interest income. For each category of earning assets and interest-bearing liabilities, information is provided relating to: changes in
volume (changes in average balances multiplied by the prior year’s average interest rates); changes in rates (changes in average interest rates multiplied by the prior year’s average balances); and the total change. Changes attributable to both volume and rate have been allocated proportionately based on the relationship of the absolute dollar amount of change in each.
| | | Year Ended December 31, 2017 vs 2016 Increase (Decrease) | | Year Ended December 31, 2016 vs 2015 Increase (Decrease) | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | Volume | | Rate | | Total | | Volume | | Rate | | Total | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | (In thousands) | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year Ended December 31, 2020 vs 2019 Increase (Decrease) | Year Ended December 31, 2019 vs 2018 Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Volume | Rate | Total | Volume | Rate | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest and dividend income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest and dividend income: | |||||||||||||||||||||||||||||||||||||||||
| Cash and fed funds sold | | | $ | 281 | | | | $ | 336 | | | | $ | 617 | | | | $ | 5 | | | | $ | 70 | | | | | 75 | | Cash and fed funds sold | $ | 1,435 | $ | (2,709) | $ | (1,274) | $ | 152 | $ | 279 | $ | 431 | |||||||||||||||||||||||||||||
| Securities | | | | 286 | | | | | 498 | | | | | 784 | | | | | 1,315 | | | | | (512) | | | | | 803 | | Securities | (420) | (3) | (423) | (187) | 27 | (160) | |||||||||||||||||||||||||||||||||||
| Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans: | |||||||||||||||||||||||||||||||||||||||||
| Commercial real estate | | | | 6,206 | | | | | (1,140) | | | | | 5,066 | | | | | 7,523 | | | | | (1,009) | | | | | 6,514 | | Commercial real estate | 1,321 | (921) | 400 | 2,523 | 328 | 2,851 | |||||||||||||||||||||||||||||||||||
| Residential real estate | | | | 42 | | | | | (129) | | | | | (87) | | | | | 164 | | | | | (34) | | | | | 130 | | Residential real estate | (1,306) | (416) | (1,722) | (906) | 257 | (649) | |||||||||||||||||||||||||||||||||||
| Construction | | | | 337 | | | | | 256 | | | | | 593 | | | | | 1,110 | | | | | (12) | | | | | 1,098 | | Construction | 570 | (846) | (276) | (272) | 143 | (129) | |||||||||||||||||||||||||||||||||||
| Commercial business | | | | 3,513 | | | | | (323) | | | | | 3,190 | | | | | 1,550 | | | | | 153 | | | | | 1,703 | | Commercial business | 2,201 | (4,270) | (2,069) | (1,498) | 2,060 | 562 | |||||||||||||||||||||||||||||||||||
| Home equity | | | | (38) | | | | | 77 | | | | | 39 | | | | | (88) | | | | | 61 | | | | | (27) | | ||||||||||||||||||||||||||||||||||||||||||
| Consumer | | | | (15) | | | | | (22) | | | | | (37) | | | | | (40) | | | | | 7 | | | | | (33) | | | Consumer | (10) | 3 | (7) | (15) | 4 | (11) | ||||||||||||||||||||||||||||||||||
| Total loans | | | | 10,045 | | | | | (1,281) | | | | | 8,764 | | | | | 10,219 | | | | | (834) | | | | | 9,385 | | Total loans | 2,776 | (6,450) | (3,674) | (168) | 2,792 | 2,624 | |||||||||||||||||||||||||||||||||||
| Federal Home Loan Bank stock | | | | 42 | | | | | 40 | | | | | 82 | | | | | 17 | | | | | 70 | | | | | 87 | | | Federal Home Loan Bank stock | 8 | (135) | (127) | (101) | 57 | (44) | ||||||||||||||||||||||||||||||||||
| Total change in interest and dividend income | | | | 10,654 | | | | | (407) | | | | | 10,247 | | | | | 11,556 | | | | | (1,206) | | | | | 10,350 | | | Total change in interest and dividend income | $ | 3,799 | $ | (9,297) | $ | (5,498) | $ | (304) | $ | 3,155 | $ | 2,851 | ||||||||||||||||||||||||||||
| Interest expense: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest expense: | |||||||||||||||||||||||||||||||||||||||||
| Deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits: | |||||||||||||||||||||||||||||||||||||||||
| NOW | | | | 3 | | | | | (19) | | | | | (16) | | | | | 1 | | | | | 46 | | | | | 47 | | NOW | $ | 34 | $ | (21) | $ | 13 | $ | 5 | $ | (34) | $ | (29) | |||||||||||||||||||||||||||||
| Money market | | | | 594 | | | | | 997 | | | | | 1,591 | | | | | 302 | | | | | 123 | | | | | 425 | | Money market | 1,082 | (4,150) | (3,068) | (609) | 1,317 | 708 | |||||||||||||||||||||||||||||||||||
| Savings | | | | 164 | | | | | 284 | | | | | 448 | | | | | (146) | | | | | (232) | | | | | (378) | | Savings | (130) | (1,470) | (1,600) | 827 | 492 | 1,319 | |||||||||||||||||||||||||||||||||||
| Time | | | | 1,366 | | | | | 1,005 | | | | | 2,371 | | | | | 1,739 | | | | | 786 | | | | | 2,525 | | | Time | 1,570 | (3,433) | (1,863) | 321 | 3,428 | 3,749 | ||||||||||||||||||||||||||||||||||
| Total deposits | | | | 2,127 | | | | | 2,267 | | | | | 4,394 | | | | | 1,896 | | | | | 723 | | | | | 2,619 | | Total deposits | 2,556 | (9,074) | (6,518) | 544 | 5,203 | 5,747 | |||||||||||||||||||||||||||||||||||
| Borrowed money | | | | 654 | | | | | (109) | | | | | 545 | | | | | 698 | | | | | 615 | | | | | 1,313 | | | Borrowed money | 373 | (390) | (17) | (925) | 627 | (298) | ||||||||||||||||||||||||||||||||||
| Total change in interest expense | | | | 2,781 | | | | | 2,158 | | | | | 4,939 | | | | | 2,594 | | | | | 1,338 | | | | | 3,932 | | | Total change in interest expense | 2,929 | (9,464) | (6,535) | (381) | 5,830 | 5,449 | ||||||||||||||||||||||||||||||||||
| Change in net interest income | | | $ | 7,873 | | | | $ | (2,565) | | | | $ | 5,308 | | | | $ | 8,962 | | | | $ | (2,544) | | | | $ | 6,418 | | Change in net interest income | $ | 870 | $ | 167 | $ | 1,037 | $ | 77 | $ | (2,675) | $ | (2,598) | |||||||||||||||||||||||||||||
| | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 such interrelated factors 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 at the balance sheet date.
The provision for loan losses for the year ended December 31, 20172020 was $1.3$7.6 million compared to a $3.9$0.4 million provision for loan losses for the year ended December 31, 2016.2019. The lower 2017increase in the provision for loan losses is attributablewas primarily due to an update to the allowance methodology and underlyingincremental loan loss assumptions, incorporatingreserves for increased credit risk relating to economic disruption and uncertainty caused by the most recent industry and product loss trends.COVID-19 pandemic.
41
Noninterest Income
Noninterest income is a component of our revenue and is comprised primarily of fees generated from loan and deposit relationships with our customers, fees generated from sales and referrals of loans, income earned on bank-ownedbank owned life insurance and gains on sales of investment securities. The following table compares noninterest income for the years ended December 31, 2017, 20162020, 2019 and 2015.2018.
| | | | Years Ended December 31, | | | 2017/2016 Change | | | 2016/2015 Change | | |||||||||||||||||||||||||||||||||
| | | | 2017 | | | 2016 | | | 2015 | | | $ | | | % | | | $ | | | % | | |||||||||||||||||||||
| | | | (Dollars in thousands) | | |||||||||||||||||||||||||||||||||||||||
| Gains and fees from sales of loans | | | | $ | 1,427 | | | | | $ | 466 | | | | | $ | 1,113 | | | | | $ | 961 | | | | | | 206% | | | | | $ | (647) | | | | | | (58)% | | |
| Bank owned life insurance | | | | | 1,170 | | | | | | 693 | | | | | | 727 | | | | | | 477 | | | | | | 69 | | | | | | (34) | | | | | | (5) | | |
| Service charges and fees | | | | | 1,007 | | | | | | 963 | | | | | | 933 | | | | | | 44 | | | | | | 5 | | | | | | 30 | | | | | | 3 | | |
| Net gain (loss) on sale of available for sale securities | | | | | 165 | | | | | | (115) | | | | | | — | | | | | | 280 | | | | | | 243 | | | | | | (115) | | | | | | 100 | | |
| (Loss) gain on sale of foreclosed real estate | | | | | (78) | | | | | | 128 | | | | | | — | | | | | | (206) | | | | | | (161) | | | | | | 128 | | | | | | 100 | | |
| Other | | | | | 938 | | | | | | 541 | | | | | | 711 | | | | | | 397 | | | | | | 73 | | | | | | (170) | | | | | | (24) | | |
| Total noninterest income | | | | $ | 4,629 | | | | | $ | 2,676 | | | | | $ | 3,484 | | | | | $ | 1,953 | | | | | | 73% | | | | | $ | (808) | | | | | | (23)% | | |
| | |||||||||||||||||||||||||||||||||||||||||||
| Years Ended December 31, | 2020/2019 Change | 2019/2018 Change | |||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | $ | % | $ | % | |||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||
| Bank owned life insurance | $ | 967 | $ | 1,008 | $ | 1,057 | $ | (41) | (4) | % | $ | (49) | (5) | % | |||||||||||||||||||||||||||
| Service charges and fees | 788 | 1,023 | 1,090 | (235) | (23) | (67) | (6) | ||||||||||||||||||||||||||||||||||
| Gains and fees from sales of loans | 43 | 1,791 | 984 | (1,748) | (98) | 807 | 82 | ||||||||||||||||||||||||||||||||||
| Gain (loss) on sale of other real estate owned, net | 19 | (102) | — | 121 | (119) | (102) | N/A | ||||||||||||||||||||||||||||||||||
| Net gain on sale of available for sale securities | — | 76 | 222 | (76) | (100) | (146) | (66) | ||||||||||||||||||||||||||||||||||
| Other | 1,067 | 1,448 | 547 | (381) | (26) | 901 | 165 | ||||||||||||||||||||||||||||||||||
| Total noninterest income | $ | 2,884 | $ | 5,244 | $ | 3,900 | $ | (2,360) | (45) | % | $ | 1,344 | 34 | % | |||||||||||||||||||||||||||
Year ended December 31, 20172020 compared to year ended December 31, 20162019
Noninterest income totaled $4.6decreased by $2.4 million to $2.9 million for the year ended December 31, 2017, compared to $2.7 million for the year ended December 31, 2016. This increase was primarily driven by income earned from the Company’s additional purchases of Bank Owned Life Insurance, an increase in the gains and fees from the sales of loans and rental income from the headquarters building acquired in the fourth quarter of 2016.
The increase isdecrease in noninterest income was primarily related to rental income earneda result of the absence of gains and fees from the headquarters building acquired in the fourth quarter of 2016.
Noninterest Expense
The following table compares noninterest expense for the years ended December 31, 2017, 20162020, 2019 and 2015.2018.
| | | Years Ended December 31, | | 2017/2016 Change | | 2016/2015 Change | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | 2017 | | 2016 | | 2015 | | $ | | % | | $ | | % | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | (Dollars in thousands) | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Years Ended December 31, | 2020/2019 Change | 2019/2018 Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Salaries and employee benefits | | | $ | 16,284 | | | | $ | 15,655 | | | | $ | 15,736 | | | | $ | 629 | | | | | 4% | | | | $ | (81) | | | | | (1)% | | Salaries and employee benefits | $ | 21,355 | $ | 19,434 | $ | 18,973 | $ | 1,921 | 10 | % | $ | 461 | 2 | % | ||||||||||||||||||||||||||||||||||
| Occupancy and equipment | | | | 6,165 | | | | | 5,811 | | | | | 5,341 | | | | | 354 | | | | | 6 | | | | | 470 | | | | | 9 | | Occupancy and equipment | 10,926 | 7,594 | 6,790 | 3,332 | 44 | 804 | 12 | |||||||||||||||||||||||||||||||||||||||||
| Data processing | Data processing | 3,216 | 2,067 | 2,033 | 1,149 | 56 | 34 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Professional services | | | | 2,072 | | | | | 1,654 | | | | | 1,447 | | | | | 418 | | | | | 25 | | | | | 207 | | | | | 14 | | Professional services | 2,110 | 1,857 | 2,103 | 253 | 14 | (246) | (12) | |||||||||||||||||||||||||||||||||||||||||
| Data processing | | | | 1,866 | | | | | 1,603 | | | | | 1,523 | | | | | 263 | | | | | 16 | | | | | 80 | | | | | 5 | | |||||||||||||||||||||||||||||||||||||||||||||||||
| Director fees | Director fees | 1,214 | 863 | 1,044 | 351 | 41 | (181) | (17) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| FDIC insurance | FDIC insurance | 791 | 74 | 779 | 717 | 969 | (705) | (91) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Marketing | | | | 1,193 | | | | | 948 | | | | | 985 | | | | | 245 | | | | | 26 | | | | | (37) | | | | | (4) | | Marketing | 630 | 971 | 1,587 | (341) | (35) | (616) | (39) | |||||||||||||||||||||||||||||||||||||||||
| FDIC insurance | | | | 1,116 | | | | | 660 | | | | | 672 | | | | | 456 | | | | | 69 | | | | | (12) | | | | | (2) | | |||||||||||||||||||||||||||||||||||||||||||||||||
| Director fees | | | | 912 | | | | | 859 | | | | | 951 | | | | | 53 | | | | | 6 | | | | | (92) | | | | | (10) | | |||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of intangibles | | | | 118 | | | | | 151 | | | | | 196 | | | | | (33) | | | | | (22) | | | | | (45) | | | | | (23) | | |||||||||||||||||||||||||||||||||||||||||||||||||
| Foreclosed real estate | | | | 70 | | | | | 157 | | | | | 168 | | | | | (87) | | | | | (55) | | | | | (11) | | | | | (7) | | |||||||||||||||||||||||||||||||||||||||||||||||||
| Merger and acquisition related expenses | | | | — | | | | | — | | | | | 2 | | | | | — | | | | | — | | | | | (2) | | | | | (100) | | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other | | | | 2,727 | | | | | 2,046 | | | | | 2,150 | | | | | 681 | | | | | 33 | | | | | (104) | | | | | (5) | | | Other | 2,571 | 2,766 | 2,324 | (195) | (7) | 442 | 19 | ||||||||||||||||||||||||||||||||||||||||
| Total noninterest expense | | | $ | 32,523 | | | | $ | 29,544 | | | | $ | 29,171 | | | | $ | 2,979 | | | | | 10% | | | | $ | 373 | | | | | 1% | | Total noninterest expense | $ | 42,813 | $ | 35,626 | $ | 35,633 | $ | 7,187 | 20 | % | $ | (7) | — | % | ||||||||||||||||||||||||||||||||||
| | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Year ended December 31, 20172020 compared to year ended December 31, 20162019
Noninterest expense was $32.5increased by $7.2 million, or 20%, to $42.8 million for the year ended December 31, 2017,2020 compared to $29.5the 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.
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Salaries and employee benefits totaled $21.4 million for the year ended December 31, 2016. The2020, an increase of $3.0$1.9 million or 10%, was primarily driven by anwhen compared to the same period in 2019. The increase in salaries and employee benefits occupancy and equipment expenses, professional services and other expenses related to growth and strategic initiatives.
Occupancy and consulting services to support the overall growth of the business.
Data processing expense totaled $3.2 million for the year ended December 31, 2015. The2020, an increase of $0.4$1.1 million or 1%, largely reflects higher occupancy and equipment expense, reflecting IT related expenses to support growth initiatives, rent expense related to the opening of the Norwalk branch in March of 2015 and higher professional services expense as a result of an increase in fees paid in relation to strategic initiatives.
Income Taxes
Income tax expense for the years ended December 31, 2017, 20162020, 2019 and 20152018 totaled $11.3$1.4 million, $6.0$4.7 million and $4.8$3.7 million, respectively. The effective tax rates for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, were 45.0%19.1%, 32.6%20.6% and 34.9%17.6%, respectively. The increase in the effective tax rate for the year ended December 31, 2017 is primarily due to the Tax Cuts and Jobs Act of 2017, which resulted in a $3.3 million write-down of the Company’s deferred tax asset which was recognized as a direct increase to income tax expense.
Our net deferred tax asset at December 31, 2017,2020 was $4.9$11.3 million, compared to $9.1$5.8 million at December 31, 2016.2019. The decreaseincrease in the deferred tax asset at December 31, 2017 is2020 when compared to the same period in 2019 was primarily a result of the tax law changes enacted in late 2017, for which the Company recognized a write-down of its deferred tax assetan increase in the amount of $3.3 million.allowance for loan losses and unrealized losses on derivatives.
On October 8, 2015, the Bank established a new wholly-owned subsidiary, Bankwell Loan Servicing Group, Inc. (a Passive Investment Company “PIC”). The PIC was organized in accordance with Connecticut statutes to hold and manage certain loans that are collateralized by real estate. Income earned by the PIC is exempt from Connecticut income tax and any dividends paid by the PIC to the Bank are not taxable income for Connecticut income tax purposes. See Note 13 to our Consolidated Financial Statements for further information regarding income taxes.
Financial Condition
Summary
Shareholders’ equity totaled $176.6 million as of December 31, 2020, a decrease of $5.8 million compared to December 31, 2019, primarily a result of an $8.1 million unfavorable impact to accumulated other comprehensive loss driven by fair value marks related to hedge positions involving interest rate swaps, as well as dividends paid of $4.4 million and common stock repurchases of $1.0 million. The decrease was partially offset by net income for the year ended December 31, 2020 of $5.9 million. The marks on the interest rate swaps are driven by lower long term market interest rates in 2020 when compared to 2019. The Company's interest rate swaps are used to hedge interest rate risk. The Company's current interest rate swap positions will cause a decrease to other comprehensive income in a falling interest rate environment and an increase in a rising interest rate environment.
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Loan Portfolio
We originate commercial real estate loans, construction loans, commercial business loans and other consumer loans. Lending activities are conducted principally in the New York metropolitan area and throughout Connecticut, with the majority in Fairfield and New Haven Counties of Connecticut. Our loan portfolio is the largest category of our earnings assets.
The following table compares the composition of our loan portfolio for the dates indicated:
| | | 2017 | | 2016 | | Change | | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | Total | | % | | Total | | % | | | ||||||||||||||||||||||||||||||||||||||||||||||||||
| | | (In thousands) | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | % | Total | % | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Real estate loans: | | | | | | | | | | | | | | | | | | | | | | | | | | Real estate loans: | ||||||||||||||||||||||||||||||||||
| Residential | | | $ | 193,524 | | | | | 12.54% | | | | $ | 195,729 | | | | | 14.33% | | | | $ | (2,205) | | Residential | $ | 113,557 | 6.99 | % | $ | 147,109 | 9.17 | % | $ | (33,552) | ||||||||||||||||||||||||
| Commercial | | | | 987,242 | | | | | 63.98 | | | | | 845,322 | | | | | 61.89 | | | | | 141,920 | | Commercial | 1,148,383 | 70.64 | 1,128,614 | 70.34 | 19,769 | |||||||||||||||||||||||||||||
| Construction | | | | 101,636 | | | | | 6.59 | | | | | 107,441 | | | | | 7.86 | | | | | (5,805) | | | Construction | 87,007 | 5.35 | 98,583 | 6.14 | (11,576) | ||||||||||||||||||||||||||||
| | | | | 1,282,402 | | | | | 83.11 | | | | | 1,148,492 | | | | | 84.08 | | | | | 133,910 | | |||||||||||||||||||||||||||||||||||
| 1,348,947 | 82.98 | 1,374,306 | 85.65 | (25,359) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial business | | | | 259,995 | | | | | 16.85 | | | | | 215,914 | | | | | 15.81 | | | | | 44,081 | | Commercial business | 276,601 | 17.02 | 230,028 | 14.34 | 46,573 | |||||||||||||||||||||||||||||
| Consumer | | | | 619 | | | | | 0.04 | | | | | 1,533 | | | | | 0.11 | | | | | (914) | | | Consumer | 79 | — | 150 | 0.01 | (71) | ||||||||||||||||||||||||||||
| Total loans | | | $ | 1,543,016 | | | | | 100.00% | | | | $ | 1,365,939 | | | | | 100.00% | | | | $ | 177,077 | | Total loans | $ | 1,625,627 | 100.00 | % | $ | 1,604,484 | 100.00 | % | $ | 21,143 | ||||||||||||||||||||||||
| | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Primary loan categories
Residential real estate. Residential real estate loans decreased by $2.2$33.6 million, or 1.1%22.8%, at December 31, 20172020 compared to December 31, 20162019 and amounted to $193.5$113.6 million, representing 13%7% of total loans at December 31, 2017.2020. In the fourth quarter of 2017, management made the strategic decision to no longer originate residential mortgage loans. We originated residential real estate mortgages for our loan portfolio and for sale in the secondary market. Loans may be sold with servicing retained or released. The mix and volume of residential mortgage loan originations varied in response to changes in market interest rates and customer preferences. During the years ended December 31, 2017 and 2016, the majority of our mortgage originations were comprised of adjustable-rate loans for our loan portfolio.
Commercial real estate. Commercial real estate loans were $987.2 million$1.1 billion and represented 64%71% of our total loan portfolio at December 31, 2017,2020, a net increase of $141.9$19.8 million, or 17%1.75%, from December 31, 2016.2019. Commercial real estate loan growth during these periodsthis period largely reflects strong production from experienced relationship managers in the marketplace and thetheir ability to source quality opportunities, and enhanced lending to existing customers. Commercial real estate loans are secured by a variety of property types, including office buildings, retail facilities, commercial mixed use and multi-family dwellings.
Construction. Construction loans were $87.0 million at December 31 2020, down $11.6 million from December 31, 2019. Construction loans totaled $98.6 million at December 31, 2019. Commercial construction loans consist of commercial development projects, such as apartment buildings and condominiums, as well as office buildings, retail and other income producing properties and land loans.
Commercial business. Commercial business loans were $260.0$276.6 million and represented 17% of our total loan portfolio at December 31, 2017, compared to $215.92020, a net increase of $46.6 million, and 16%or 20.2%, of the total portfolio atfrom December 31, 2016. Growth in our commercial business2019. The December 31, 2020 balance includes $34.8 million of PPP loans largely reflects our commitment to this segment, including small business lending.made under the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"). Commercial business loans primarily provide working capital, equipment financing, financing for leasehold improvements and financing for expansion and are generally secured by assignments of corporate assets, real estate and personal guarantees of the business owners.
We evaluate the appropriateness of our underwriting standards in response to changes in national and regional economic conditions, including such matters as market interest rates, energy prices, trends in real estate values, and employment levels. Based on our assessment of these matters, underwriting standards and credit monitoring activities are enhanced from time to time in response to changes in these conditions.
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The following table presents an analysis of the maturity of our commercial real estate, commercial construction and commercial business loan portfolios as of December 31, 2017.2020.
| | | December 31, 2017 | | |||||||||||||||||||||||||||||||||||||||||||||
| | | Commercial Real Estate | | Commercial Construction | | Commercial Business | | Total | | |||||||||||||||||||||||||||||||||||||||
| | | (In thousands) | | |||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial Real Estate | Commercial Construction | Commercial Business | Total | |||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Amounts due: | | | | | | | | | | | | | | | | | | | | | Amounts due: | |||||||||||||||||||||||||||
| One year or less | | | $ | 27,710 | | | | $ | 29,355 | | | | $ | 19,944 | | | | $ | 77,009 | | | One year or less | $ | 82,657 | $ | 26,364 | $ | 16,847 | $ | 125,868 | ||||||||||||||||||
| After one year: | | | | | | | | | | | | | | | | | | | | | After one year: | |||||||||||||||||||||||||||
| One to five years | | | | 252,223 | | | | | 35,155 | | | | | 112,565 | | | | | 399,943 | | One to five years | 655,541 | 38,118 | 144,136 | 837,795 | |||||||||||||||||||||||
| Over five years | | | | 707,309 | | | | | 28,140 | | | | | 127,486 | | | | | 862,935 | | | Over five years | 410,185 | 22,525 | 115,618 | 548,328 | ||||||||||||||||||||||
| Total due after one year | | | | 959,532 | | | | | 63,295 | | | | | 240,051 | | | | | 1,262,878 | | | Total due after one year | 1,065,726 | 60,643 | 259,754 | 1,386,123 | ||||||||||||||||||||||
| Total | | | $ | 987,242 | | | | $ | 92,650 | | | | $ | 259,995 | | | | $ | 1,339,887 | | Total | $ | 1,148,383 | $ | 87,007 | $ | 276,601 | $ | 1,511,991 | |||||||||||||||||||
| | ||||||||||||||||||||||||||||||||||||||||||||||||
The following table presents an analysis of the interest rate sensitivity of our commercial real estate, commercial construction and commercial business loan portfolios due after one year as of December 31, 2017.2020.
| | | December 31, 2017 | | |||||||||||||||||||||||||||||||||
| | | Adjustable Interest Rate | | Fixed Interest Rate | | Total | | |||||||||||||||||||||||||||||
| | | (In thousands) | | |||||||||||||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||||||||||||
| Adjustable Interest Rate | Fixed Interest Rate | Total | ||||||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||
| Commercial real estate | | | $ | 305,107 | | | | $ | 654,425 | | | | $ | 959,532 | | Commercial real estate | $ | 314,197 | $ | 751,529 | $ | 1,065,726 | ||||||||||||||
| Commercial construction | | | | 21,853 | | | | | 41,442 | | | | | 63,295 | | Commercial construction | 26,371 | 34,272 | 60,643 | |||||||||||||||||
| Commercial business | | | | 142,563 | | | | | 97,488 | | | | | 240,051 | | | Commercial business | 133,162 | 126,592 | 259,754 | ||||||||||||||||
| Total loans due after one year | | | $ | 469,523 | | | | $ | 793,355 | | | | $ | 1,262,878 | | Total loans due after one year | $ | 473,730 | $ | 912,393 | $ | 1,386,123 | ||||||||||||||
| | ||||||||||||||||||||||||||||||||||||
Asset Quality
We actively manage asset quality through our underwriting practices and collection operations. Our boardBoard of directorsDirectors monitors credit risk management through two committees, the DirectorsDirectors' Loan
Committee (DLC)("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 systems and 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 monthlyperiodic basis. While we continue to adhere to prudent underwriting standards, our loan portfolio is not immune to potential negative consequences arising as a result of general economic weakness, such as a prolonged downturn in the housing market on a regional or national scale. Decreases in real estate values could adversely affect the value of property used as collateral for loans. In addition, adverse changes in the economy could have a negative effect on the ability of borrowers to make scheduled loan payments, which would likely have an adverse impact on earnings.
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 borrowers’borrower's creditworthiness and the type of collateral. The borrower’s ability to service the debt is monitored on an ongoing basis. Real estate is the primary form of collateral. Other important forms of collateral are business assets, time deposits and marketable securities. While collateral provides assurance as a secondary source of repayment, the Company ordinarily requires the primary source of repayment for commercial loans, to be based on the borrower’s ability to generate continuing cash flows. In the fourth quarter of 2017 management made the strategic decision to no longer originate residential mortgage loans. At 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 allowedgenerally required that generally, 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. Private mortgage insurance may have been required for that portion of the residential first mortgage loan in excess of 80% of the appraised value of the property.
Credit risk management involves a partnership between our relationship managers and our credit approval, portfolio management, credit administration and collections personnel. 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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Acquired Loans. Loans acquired in acquisitions are initially recorded at fair value with no carryover of the related allowance for credit losses. Acquired loans that have evidence of deterioration in credit quality since origination and for which it is probable, at acquisition, that all contractually required payments will not be collected are initially recorded at fair value without recording an allowance for loan losses. Determining the fair value of the loans is determined using market participant assumptions in estimating the amount and timing of principal and interest cash flows initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of interest.
Under the accounting model for acquired loans, the excess of cash flows expected to be collected over the carrying amount of the loans, referred to as the “accretable yield”, is accreted into interest income over the life of the loans. Accordingly, acquired loans are not subject to classification as nonaccrual in the same manner as originated loans. Rather, acquired loans are considered to be accruing loans because their interest income relates to the accretable yield recognized and not to contractual interest payments. The excess of the loan’sloans' contractually required payments over the cash flows expected to be collected is the nonaccretable difference. As such, charge-offs on acquired loans are first applied to the nonaccretable difference and then to any allowance for loan losses recognized subsequent to the acquisition. A decrease in expected cash flows in subsequent periods may indicate that the loan pool is impaired, which would require the establishment of an allowance for loan losses by a charge to the provision for loan losses.
Nonperforming Assets. Nonperforming assets include nonaccrual loans and property acquired through foreclosures or repossession. The following table presents nonperforming assets and additional asset quality data for the dates indicated:
| | | At December 31, | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | | |||||||||||||||||||||||||||||||||||||||||||||||||
| | | (In thousands) | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| At December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Nonaccrual loans: | | | | | | | | | | | | | | | | | | | | | | | | | | Nonaccrual loans: | ||||||||||||||||||||||||||||||||||
| Real estate loans: | | | | | | | | | | | | | | | | | | | | | | | | | | Real estate loans: | ||||||||||||||||||||||||||||||||||
| Residential | | | $ | 1,590 | | | | $ | 1,612 | | | | $ | 1,365 | | | | $ | — | | | | $ | 1,003 | | Residential | $ | 1,492 | $ | 1,560 | $ | 3,812 | $ | 1,590 | $ | 1,612 | ||||||||||||||||||||||||
| Commercial | | | | 3,371 | | | | | 446 | | | | | 1,264 | | | | | 3,220 | | | | | — | | Commercial | 21,093 | 5,222 | 5,950 | 3,371 | 446 | |||||||||||||||||||||||||||||
| Commercial business | | | | 520 | | | | | 538 | | | | | 1,160 | | | | | — | | | | | — | | Commercial business | 1,834 | 3,806 | 4,320 | 520 | 538 | |||||||||||||||||||||||||||||
| Construction | Construction | 8,997 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer | | | | — | | | | | 341 | | | | | 2 | | | | | 142 | | | | | — | | | Consumer | — | — | — | — | 341 | ||||||||||||||||||||||||||||
| Total non accrual loans | | | | 5,481 | | | | | 2,937 | | | | | 3,791 | | | | | 3,362 | | | | | 1,003 | | |||||||||||||||||||||||||||||||||||
| Total nonaccrual loans | Total nonaccrual loans | 33,416 | 10,588 | 14,082 | 5,481 | 2,937 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property acquired through foreclosure or repossession, net | | | | — | | | | | 272 | | | | | 1,248 | | | | | 950 | | | | | 829 | | | Property acquired through foreclosure or repossession, net | — | — | — | — | 272 | ||||||||||||||||||||||||||||
| Total nonperforming assets | | | $ | 5,481 | | | | $ | 3,209 | | | | $ | 5,039 | | | | $ | 4,312 | | | | $ | 1,832 | | Total nonperforming assets | $ | 33,416 | $ | 10,588 | $ | 14,082 | $ | 5,481 | $ | 3,209 | ||||||||||||||||||||||||
| Nonperforming assets to total assets | | | | 0.31% | | | | | 0.20% | | | | | 0.38% | | | | | 0.39% | | | | | 0.23% | | Nonperforming assets to total assets | 1.48 | % | 0.56 | % | 0.75 | % | 0.31 | % | 0.20 | % | ||||||||||||||||||||||||
| Nonaccrual loans to total loans | | | | 0.36% | | | | | 0.22% | | | | | 0.33% | | | | | 0.36% | | | | | 0.16% | | |||||||||||||||||||||||||||||||||||
| Nonperforming loans to total loans | Nonperforming loans to total loans | 2.06 | % | 0.66 | % | 0.88 | % | 0.36 | % | 0.22 | % | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total past due loans to total loans | | | | 1.67% | | | | | 0.47% | | | | | 0.51% | | | | | 0.86% | | | | | 0.73% | | 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 totaled $5.5 million and represented 0.31%as a percentage of total assets was 1.48% at December 31, 2017, compared to $3.2 million and 0.20% of total assets2020, up from 0.56% at December 31, 2016.
Nonaccrual Loans. Loans greater than 90 days past due are generally put on nonaccrual status (excluding certain acquired credit impaired loans). Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued, but uncollected, is reversed against current period income. Subsequent payments are recognized on thea cash basis or principal recapture basis depending on a number of factors including probability of collection and if impairment is identified. A nonaccrual loan is restored to accrual status when it is no longer delinquent and collectability of interest and principal is no longer in doubt. Total nonaccrual loans were $5.5 million at December 31, 2017.
At December 31, 20172020 and 2016,2019, there were no commitments to lend additional funds to any borrower on nonaccrual status, respectively.status.
Past Due Loans. When a loan is 15 days past due, the Company sends the borrower a late notice. The Company also contactsattempts 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
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the borrower personally to determine the reason for the delinquency and ensure the borrower understands the terms of the loan. If necessary, subsequent delinquency notices are issued and the account will be monitored on a regular basis thereafter. Byafter the 90th day of delinquency, the Company will send the borrower a final demand for payment or may take other appropriate legal action. A summary report of all loans 30 days or more past due is provided to the Board
of Directors of the Company each month.periodically. Loans greater than 90 days past due are generally put on nonaccrual status. A nonaccrual loan is restored to accrual status when it is no longer delinquent and collectability of interest and principal is no longer in doubt. A loan mayis considered to be considered for return to accrual statusno longer delinquent when timely payments are made for a period of at least six months (one year for loans providing for quarterly or semi-annual payments) by the borrower in accordance with the contractual terms. Loans that are granted payment deferrals under the CARES Act are not required to be reported as past due or placed on non-accrual status if the criteria under section 4013 of the CARES Act are met.
The following table presents past due loans as of December 31, 20172020 and 2016:
| | | | 31 – 60 Days Past Due | | | 61 – 90 Days Past Due | | | Greater Than 90 Days | | | Total Past Due | |||||||||||
| | | | (In thousands) | ||||||||||||||||||||
| As of December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | |
| Originated Loans | | | | | | | | | | | | | | | | | | | | | | | |
| Residential real estate | | | | $ | 1,092 | | | | | $ | 2,244 | | | | | $ | 969 | | | | | $ | 4,305 |
| Commercial real estate | | | | | 9,529 | | | | | | 4,116 | | | | | | 1,444 | | | | | | 15,089 |
| Commercial business | | | | | 4,223 | | | | | | — | | | | | | 142 | | | | | | 4,365 |
| Total originated loans | | | | | 14,844 | | | | | | 6,360 | | | | | | 2,555 | | | | | | 23,759 |
| Acquired Loans | | | | | | | | | | | | | | | | | | | | | | | |
| Residential real estate | | | | | 156 | | | | | | — | | | | | | 192 | | | | | | 348 |
| Commercial real estate | | | | | 499 | | | | | | — | | | | | | 630 | | | | | | 1,129 |
| Commercial business | | | | | 95 | | | | | | 162 | | | | | | 339 | | | | | | 596 |
| Consumer | | | | | 3 | | | | | | — | | | | | | 2 | | | | | | 5 |
| Total acquired loans | | | | | 753 | | | | | | 162 | | | | | | 1,163 | | | | | | 2,078 |
| Total loans | | | | $ | 15,597 | | | | | $ | 6,522 | | | | | $ | 3,718 | | | | | $ | 25,837 |
| As of December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | |
| Originated Loans | | | | | | | | | | | | | | | | | | | | | | | |
| Residential real estate | | | | $ | — | | | | | $ | 173 | | | | | $ | 969 | | | | | $ | 1,142 |
| Commercial real estate | | | | | 147 | | | | | | 1,848 | | | | | | 302 | | | | | | 2,297 |
| Commercial business | | | | | — | | | | | | — | | | | | | 378 | | | | | | 378 |
| Total originated loans | | | | | 147 | | | | | | 2,021 | | | | | | 1,649 | | | | | | 3,817 |
| Acquired Loans | | | | | | | | | | | | | | | | | | | | | | | |
| Residential real estate | | | | | — | | | | | | — | | | | | | 453 | | | | | | 453 |
| Commercial real estate | | | | | 866 | | | | | | 722 | | | | | | 143 | | | | | | 1,731 |
| Commercial business | | | | | 99 | | | | | | 249 | | | | | | — | | | | | | 348 |
| Consumer | | | | | 6 | | | | | | — | | | | | | — | | | | | | 6 |
| Total acquired loans | | | | | 971 | | | | | | 971 | | | | | | 596 | | | | | | 2,538 |
| Total loans | | | | $ | 1,118 | | | | | $ | 2,992 | | | | | $ | 2,245 | | | | | $ | 6,355 |
| | |||||||||||||||||||||||
| 30–59 Days Past Due | 60–89 Days Past Due | 90 Days or Greater Past Due | Total Past Due | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| As of December 31, 2020 | |||||||||||||||||||||||
| Residential real estate | $ | 245 | $ | — | $ | 177 | $ | 422 | |||||||||||||||
| Commercial real estate | 1,305 | 193 | 2,541 | 4,039 | |||||||||||||||||||
| Construction | 8,997 | — | — | 8,997 | |||||||||||||||||||
| Commercial business | 45 | 55 | 1,526 | 1,626 | |||||||||||||||||||
| Total loans | $ | 10,592 | $ | 248 | $ | 4,244 | $ | 15,084 | |||||||||||||||
| As of December 31, 2019 | |||||||||||||||||||||||
| Residential real estate | $ | — | $ | 943 | $ | 281 | $ | 1,224 | |||||||||||||||
| Commercial real estate | 355 | — | 5,935 | 6,290 | |||||||||||||||||||
| Construction | 1,357 | — | — | 1,357 | |||||||||||||||||||
| Commercial business | — | — | 3,455 | 3,455 | |||||||||||||||||||
| Total loans | $ | 1,712 | $ | 943 | $ | 9,671 | $ | 12,326 | |||||||||||||||
Troubled Debt Restructurings (TDR). Loans are considered restructured in a troubled debt restructuring when the borrower is experiencing financial difficulties and the Bank has granted concessions to a borrower due to the borrower’s financial condition that we otherwise would not have considered. These concessions may include modifications of the terms of the debt such as reduction of the stated interest rate other than normal market rate adjustments, extension of maturity dates, or reduction of principal balance or accrued interest. The decision to restructure a loan, rather than aggressively enforcing the collection of the loan, may benefit us by increasing the ultimate probability of collection.
Section 4013 of the CARES Act provides relief from certain requirements under GAAP and permits a financial institution to elect to suspend troubled debt restructuring accounting, in certain circumstances, beginning March 1, 2020 and ending on the earlier of January 1, 2022, or sixty days after the national emergency concerning COVID-19 terminates. All short term loan modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any request for relief are not considered TDRs.
As of December 31, 2020, the Company had active COVID-19 related deferrals totaling $29.4 million (excluding SBA loans, which are paid for 6 months by the SBA on behalf of borrowers). The Company granted initial three month payment deferral periods and, in some instances, extended the initial payment deferral period. This excludes SBA loans, which are mandated to receive an automatic six month deferral. These deferrals are not considered troubled debt restructurings based on Section 4013 of the CARES Act and interagency guidance issued in March of 2020.
Restructured loans are classified as accruing or non-accruingnonaccruing based on management’s assessment of the collectability of the loan. Loans which are already on nonaccrual status at the time of the restructuring
generally remain on nonaccrual status for approximately six months before management considers such loans for return to accruing status. 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. Except for four non-accrual loans totaling $553 thousand, all TDRs atAt December 31, 20172020 and December 31, 2019 there were performing in compliance under their modified termsthree nonaccrual loans identified as TDRs totaling $1.4 million and therefore, were on accrual status.three nonaccrual loans identified as TDRs totaling $1.6 million, respectively.
47
The following table presents information on troubled debt restructured loans:
| | | December 31, | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | | |||||||||||||||||||||||||||||||||||||||||||||||||
| | | (In thousands) | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| At December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accruing troubled debt restructured loans: | | | | | | | | | | | | | | | | | | | | | | | | | | Accruing troubled debt restructured loans: | ||||||||||||||||||||||||||||||||||
| Residential real estate | | | $ | 2,957 | | | | $ | 69 | | | | $ | 944 | | | | $ | 2,057 | | | | $ | 961 | | Residential real estate | $ | 2,399 | $ | 2,460 | $ | 2,722 | $ | 2,957 | $ | 69 | ||||||||||||||||||||||||
| Commercial real estate | | | | 51 | | | | | 402 | | | | | 4,518 | | | | | 216 | | | | | — | | Commercial real estate | 4,929 | 4,952 | 37 | 51 | 402 | |||||||||||||||||||||||||||||
| Commercial business | | | | 1,346 | | | | | 893 | | | | | 779 | | | | | 1,338 | | | | | 642 | | | Commercial business | 328 | 524 | 923 | 1,346 | 893 | ||||||||||||||||||||||||||||
| Accruing troubled debt restructured loans | | | | 4,354 | | | | | 1,364 | | | | | 6,241 | | | | | 3,611 | | | | | 1,603 | | | Accruing troubled debt restructured loans | 7,656 | 7,936 | 3,682 | 4,354 | 1,364 | ||||||||||||||||||||||||||||
| Nonaccrual troubled debt restructured loans: | | | | | | | | | | | | | | | | | | | | | | | | | | Nonaccrual troubled debt restructured loans: | ||||||||||||||||||||||||||||||||||
| Residential real estate | Residential real estate | $ | 872 | $ | 943 | $ | 3,008 | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate | | | | 334 | | | | | — | | | | | 970 | | | | | — | | | | | — | | Commercial real estate | — | — | 334 | 334 | — | |||||||||||||||||||||||||||||
| Commercial business | | | | 219 | | | | | 66 | | | | | 90 | | | | | — | | | | | — | | | Commercial business | 571 | 680 | 217 | 219 | 66 | ||||||||||||||||||||||||||||
| Nonaccrual troubled debt restructured loans | | | | 553 | | | | | 66 | | | | | 1,060 | | | | | — | | | | | — | | | Nonaccrual troubled debt restructured loans | 1,443 | 1,623 | 3,559 | 553 | 66 | ||||||||||||||||||||||||||||
| Total troubled debt restructured loans | | | $ | 4,907 | | | | $ | 1,430 | | | | $ | 7,301 | | | | $ | 3,611 | | | | $ | 1,603 | | Total troubled debt restructured loans | $ | 9,099 | $ | 9,559 | $ | 7,241 | $ | 4,907 | $ | 1,430 | ||||||||||||||||||||||||
| | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
As of December 31, 20172020 and 2016,2019, loans classified as troubled debt restructurings totaled $4.9$9.1 million and $1.4$9.6 million, respectively. The $4.9 million balance at December 31, 2017 consists of 15 loans. The $1.4 million balance at December 31, 2016 consisted of 10 loans.
Potential Problem Loans. We classify certain loans as “special mention”, “substandard”, or “doubtful”, based on criteria consistent with guidelines provided by our banking regulators. Potential problem loans represent loans that are currently performing, but for which known information about possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonperforming at some time in the future. These loans are not included in the amounts of nonaccrual or restructured loans presented above. We cannot predict the extent to which economic conditions or other factors may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, become restructured, or require increased allowance coverage and provision for loan losses. Potential problem loans are assessed for loss exposure using the methods described in Note 65 to our Consolidated Financial Statements under the caption “Credit Quality Indicators”.
We expect the levels of non-performingnonperforming assets and potential problem loans to fluctuate in response to changing economic and market conditions, and the relative sizes of the respective loan portfolios, along with our degree of success in resolving problem assets. We take a proactive approach with respect to the identification and resolution of problem loans.
Allowance for Loan Losses
We evaluate the adequacy of the allowance 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. See additional discussion regarding our allowance for loan losses under the caption “Critical Accounting Policies and Estimates.”
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. We do not recognize a recovery when an updated appraisal indicates a subsequent increase in value of the collateral.
Our charge-off policies, which comply with standards established by our banking regulators, are consistently applied from period to period. 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.
48
The following table presents the activity in our allowance for loan losses and related ratios:ratios for the dates indicated:
| | | December 31, | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | | |||||||||||||||||||||||||||||||||||||||||||||||||
| | | (Dollars in thousands) | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| At December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at beginning of period | | | $ | 17,982 | | | | $ | 14,169 | | | | $ | 10,860 | | | | $ | 8,382 | | | | $ | 7,941 | | Balance at beginning of period | $ | 13,509 | $ | 15,462 | $ | 18,904 | $ | 17,982 | $ | 14,169 | ||||||||||||||||||||||||
| Charge-offs: | | | | | | | | | | | | | | | | | | | | | | | | | | Charge-offs: | ||||||||||||||||||||||||||||||||||
| Residential real estate | | | | — | | | | | — | | | | | — | | | | | — | | | | | — | | Residential real estate | — | (875) | (420) | — | — | |||||||||||||||||||||||||||||
| Commercial real estate | | | | — | | | | | — | | | | | — | | | | | — | | | | | (166) | | Commercial real estate | — | (594) | (5,614) | — | — | |||||||||||||||||||||||||||||
| Construction | | | | — | | | | | (7) | | | | | — | | | | | (100) | | | | | — | | Construction | — | — | — | — | (7) | |||||||||||||||||||||||||||||
| Commercial business | | | | (521) | | | | | (69) | | | | | (15) | | | | | — | | | | | — | | Commercial business | (83) | (897) | (815) | (521) | (69) | |||||||||||||||||||||||||||||
| Consumer | | | | (51) | | | | | (35) | | | | | (15) | | | | | (3) | | | | | (4) | | | Consumer | (40) | (75) | (77) | (51) | (35) | ||||||||||||||||||||||||||||
| Total charge-offs | | | | (572) | | | | | (111) | | | | | (30) | | | | | (103) | | | | | (170) | | | Total charge-offs | (123) | (2,441) | (6,926) | (572) | (111) | ||||||||||||||||||||||||||||
| Recoveries: | | | | | | | | | | | | | | | | | | | | | | | | | | Recoveries: | ||||||||||||||||||||||||||||||||||
| Residential real estate | | | | 146 | | | | | — | | | | | — | | | | | — | | | | | — | | Residential real estate | — | — | — | 146 | — | |||||||||||||||||||||||||||||
| Commercial real estate | Commercial real estate | 15 | — | 18 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer | | | | 3 | | | | | 10 | | | | | 9 | | | | | 425 | | | | | 26 | | Consumer | 3 | 32 | 7 | 3 | 10 | |||||||||||||||||||||||||||||
| Commercial Business | | | | 4 | | | | | — | | | | | 100 | | | | | 4 | | | | | — | | | Commercial Business | — | 19 | 19 | 4 | — | ||||||||||||||||||||||||||||
| Total recoveries | | | | 153 | | | | | 10 | | | | | 109 | | | | | 429 | | | | | 26 | | | Total recoveries | 18 | 51 | 44 | 153 | 10 | ||||||||||||||||||||||||||||
| Net (charge-offs) recoveries | | | | (419) | | | | | (101) | | | | | 79 | | | | | 326 | | | | | (144) | | |||||||||||||||||||||||||||||||||||
| Net charge-offs | Net charge-offs | (105) | (2,390) | (6,882) | (419) | (101) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Provision charged to earnings | | | | 1,341 | | | | | 3,914 | | | | | 3,230 | | | | | 2,152 | | | | | 585 | | | Provision charged to earnings | 7,605 | 437 | 3,440 | 1,341 | 3,914 | ||||||||||||||||||||||||||||
| Balance at end of period | | | $ | 18,904 | | | | $ | 17,982 | | | | $ | 14,169 | | | | $ | 10,860 | | | | $ | 8,382 | | Balance at end of period | $ | 21,009 | $ | 13,509 | $ | 15,462 | $ | 18,904 | $ | 17,982 | ||||||||||||||||||||||||
| Net charge-offs (recoveries) to average loans | | | | 0.03% | | | | | 0.01% | | | | | (0.01%) | | | | | (0.05%) | | | | | 0.03% | | Net charge-offs (recoveries) to average loans | 0.01 | % | 0.15 | % | 0.44 | % | 0.03 | % | 0.01 | % | ||||||||||||||||||||||||
| Allowance for loan losses to total loans | | | | 1.23% | | | | | 1.32% | | | | | 1.23% | | | | | 1.17% | | | | | 1.33% | | Allowance for loan losses to total loans | 1.29 | % | 0.84 | % | 0.96 | % | 1.23 | % | 1.32 | % | ||||||||||||||||||||||||
| | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2017,2020, our allowance for loan losses was $18.9$21.0 million and represented 1.23%1.29% of total loans, compared to $18.0$13.5 million and 1.32%0.84% of total loans at December 31, 2016.2019. The decreaseincrease in the ratio of allowance for loan losses to total loans is driven by an update to the Company’s Allowance for Loan Losses methodology and underlying assumptions, incorporating the most recent industry, peer and product loss trends. The change inincremental loan loss reserve methodology was deemed necessary, in part, because a large portionreserves 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 loans in our loan portfolio and of our lending relationships are of relatively recent origin.December 31, 2020. For the years ended December 31, 2017, 20162020, 2019 and 2015,2018, the provision for loan losses charged to earnings totaled $1.3$7.6 million, $3.9$0.4 million and $3.2$3.4 million, respectively. Net charge-offs for the year ended December 31, 20172020 were $419 thousand$0.1 million and represented 0.03%0.01% of average loans, primarily reflecting $517 thousand of net charge-offs of commercial business loans. For the year ended December 31, 2016,2019, net charge offscharge-offs were $101 thousand$2.4 million and represented 0.01%0.15% of average loans, primarily reflecting $69 thousand of charge-offs of commercial business loans.
The carrying amount of total impaired loans at December 31, 20172020 was $14.9$47.7 million. This compares to a carrying amount of $4.8$22.6 million for total impaired loans at December 31, 2016.2019. The amount of allowance for loan losses related to impaired loans was $955 thousand$5.0 million and $418 thousand,$0.5 million, respectively, at December 31, 20172020 and 2016.2019.
49
The following tables presenttable presents the allocation of the allowance for loan losses and the percentage of these loansthe related loan segments to total loans:
| | | | At December 31, | | |||||||||||||||||||||||||||||||||
| | | | 2017 | | | 2016 | | | 2015 | | |||||||||||||||||||||||||||
| | | | Amount | | | Percent of Loan Portfolio | | | Amount | | | Percent of Loan Portfolio | | | Amount | | | Percent of Loan Portfolio | | ||||||||||||||||||
| | | | (Dollars in thousands) | | |||||||||||||||||||||||||||||||||
| Residential real estate | | | | $ | 1,721 | | | | | | 12.54% | | | | | $ | 1,802 | | | | | | 14.33% | | | | | $ | 1,618 | | | | | | 16.83% | | |
| Commercial real estate | | | | | 12,777 | | | | | | 63.98 | | | | | | 9,415 | | | | | | 61.89 | | | | | | 7,705 | | | | | | 60.79 | | |
| Construction | | | | | 907 | | | | | | 6.59 | | | | | | 2,105 | | | | | | 7.86 | | | | | | 1,504 | | | | | | 7.17 | | |
| Commercial business | | | | | 3,498 | | | | | | 16.85 | | | | | | 4,283 | | | | | | 15.81 | | | | | | 3,334 | | | | | | 15.06 | | |
| Consumer | | | | | 1 | | | | | | 0.04 | | | | | | 377 | | | | | | 0.11 | | | | | | 8 | | | | | | 0.15 | | |
| Total allowance for loan losses | | | | $ | 18,904 | | | | | | 100.00% | | | | | $ | 17,982 | | | | | | 100.00% | | | | | $ | 14,169 | | | | | | 100.00% | | |
| | |||||||||||||||||||||||||||||||||||||
| | | | At December 31, | | |||||||||||||||||||||
| | | | 2014 | | | 2013 | | ||||||||||||||||||
| | | | Amount | | | Percent of Loan Portfolio | | | Amount | | | Percent of Loan Portfolio | | ||||||||||||
| | | | (Dollars in thousands) | | |||||||||||||||||||||
| Residential real estate | | | | $ | 1,636 | | | | | | 20.78% | | | | | $ | 1,500 | | | | | | 26.86% | | |
| Commercial real estate | | | | | 5,480 | | | | | | 56.06 | | | | | | 3,616 | | | | | | 50.08 | | |
| Construction | | | | | 1,102 | | | | | | 6.80 | | | | | | 1,032 | | | | | | 8.16 | | |
| Commercial business | | | | | 2,638 | | | | | | 16.05 | | | | | | 2,225 | | | | | | 14.80 | | |
| Consumer | | | | | 4 | | | | | | 0.31 | | | | | | 9 | | | | | | 0.10 | | |
| Total allowance for loan losses | | | | $ | 10,860 | | | | | | 100.00% | | | | | $ | 8,382 | | | | | | 100.00% | | |
| | |||||||||||||||||||||||||
| At December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amount | Percent of Loan Portfolio | Amount | Percent of Loan Portfolio | Amount | Percent of Loan Portfolio | Amount | Percent of Loan Portfolio | Amount | Percent of Loan Portfolio | ||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential real estate | $ | 610 | 6.99 | % | $ | 730 | 9.17 | % | $ | 857 | 11.10 | % | $ | 1,721 | 12.54 | % | $ | 1,802 | 14.33 | % | |||||||||||||||||||||||||||||||||||||||
| Commercial real estate | 16,425 | 70.64 | 10,551 | 70.34 | 11,562 | 68.18 | 12,777 | 63.98 | 9,415 | 61.89 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Construction | 221 | 5.35 | 324 | 6.14 | 140 | 4.56 | 907 | 6.59 | 2,105 | 7.86 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial business | 3,753 | 17.02 | 1,903 | 14.34 | 2,902 | 16.14 | 3,498 | 16.85 | 4,283 | 15.81 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer | — | — | 1 | 0.01 | 1 | 0.02 | 1 | 0.04 | 377 | 0.11 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total allowance for loan losses | $ | 21,009 | 100.00 | % | $ | 13,509 | 100.00 | % | $ | 15,462 | 100.00 | % | $ | 18,904 | 100.00 | % | $ | 17,982 | 100.00 | % | |||||||||||||||||||||||||||||||||||||||
The allocation of the allowance for loan losses at December 31, 20172020 reflects our assessment of credit risk and probable loss within each portfolio. We believe that the level of the allowance for loan losses at December 31, 20172020 is appropriate to cover probable losses.
Investment Securities
We manage our investment securities portfolio to provide a readily available source of liquidity for balance sheet management, to generate interest income and to implement interest rate risk management strategies. Investment securitiesInvestments are designated as either marketable equity, available for sale, held to maturity or trading securities at the time of purchase. We do not currently maintain a portfolio of trading securities. Investment securities available for sale may be sold in response to changes in market conditions, prepayment risk, rate fluctuations, liquidity, or capital requirements. Investment securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity, net of tax, until realized. Investment securities held to maturity are reported at amortized cost. Marketable equity securities are reported at fair value, with any changes in fair value recognized in earnings.
The amortized cost and fair value of investment securities as of the dates indicated are presented in the following table:
| | | December 31, | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | 2017 | | 2016 | | 2015 | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | (In thousands) | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| At December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Marketable equity securities | Marketable equity securities | $ | 2,083 | $ | 2,207 | $ | 2,047 | $ | 2,118 | $ | 2,003 | $ | 2,009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Securities available for sale: | |||||||||||||||||||||||||||||||||||||||||
| U.S. Government and agency obligations | | | $ | 73,024 | | | | $ | 72,774 | | | | $ | 62,457 | | | | $ | 62,698 | | | | $ | 7,239 | | | | $ | 7,143 | | U.S. Government and agency obligations | 73,574 | 76,878 | 81,263 | 82,439 | 83,815 | 82,136 | |||||||||||||||||||||||||||||||||||
| State agency and municipal obligations | | | | 11,959 | | | | | 12,277 | | | | | 14,495 | | | | | 14,763 | | | | | 17,060 | | | | | 17,504 | | State agency and municipal obligations | — | — | — | — | 4,023 | 4,007 | |||||||||||||||||||||||||||||||||||
| Corporate bonds | | | | 7,096 | | | | | 7,137 | | | | | 10,167 | | | | | 10,290 | | | | | 11,256 | | | | | 11,437 | | Corporate bonds | 11,500 | 11,727 | — | — | 7,061 | 7,011 | |||||||||||||||||||||||||||||||||||
| Government mortgage-backed securities | | | | — | | | | | — | | | | | — | | | | | — | | | | | 4,400 | | | | | 4,497 | | | |||||||||||||||||||||||||||||||||||||||||
| Total securities available for sale | | | $ | 92,079 | | | | $ | 92,188 | | | | $ | 87,119 | | | | $ | 87,751 | | | | $ | 39,955 | | | | $ | 40,581 | | Total securities available for sale | $ | 85,074 | $ | 88,605 | $ | 81,263 | $ | 82,439 | $ | 94,899 | $ | 93,154 | |||||||||||||||||||||||||||||
| Securities held to maturity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Securities held to maturity: | |||||||||||||||||||||||||||||||||||||||||
| State agency and municipal obligations | | | | 20,465 | | | | | 21,717 | | | | | 15,710 | | | | | 15,710 | | | | | 9,026 | | | | | 9,026 | | State agency and municipal obligations | $ | 16,018 | $ | 19,962 | $ | 16,231 | $ | 18,222 | $ | 20,328 | $ | 20,890 | |||||||||||||||||||||||||||||
| Corporate bonds | | | | 1,000 | | | | | 995 | | | | | 1,000 | | | | | 977 | | | | | 1,000 | | | | | 981 | | Corporate bonds | — | — | — | — | 1,000 | 1,000 | |||||||||||||||||||||||||||||||||||
| Government mortgage-backed securities | | | | 114 | | | | | 124 | | | | | 149 | | | | | 164 | | | | | 200 | | | | | 221 | | | Government mortgage-backed securities | 60 | 70 | 77 | 85 | 93 | 98 | ||||||||||||||||||||||||||||||||||
| Total securities held to maturity | | | $ | 21,579 | | | | $ | 22,836 | | | | $ | 16,859 | | | | $ | 16,851 | | | | $ | 10,226 | | | | $ | 10,228 | | Total securities held to maturity | $ | 16,078 | $ | 20,032 | $ | 16,308 | $ | 18,307 | $ | 21,421 | $ | 21,988 | |||||||||||||||||||||||||||||
| | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
50
At December 31, 2017,2020, the carrying value of our investment securities portfolio totaled $113.8$106.9 million and represented 6%5% of total assets, compared to $104.6$100.9 million and 6%5% of total assets at December 31, 2016. This2019. The increase of $9.2$6.0 million primarily reflects purchases.purchases of corporate bonds and increases in unrealized gains. We purchase investment grade securities with a focus on liquidity, earnings and duration exposure.
The net unrealized gain position on our investment portfolio at December 31, 2017 and 20162020 was $1.4$7.5 million and $624 thousand, respectivelydid 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 $292 thousand and $200 thousand, respectively, as of December 31, 2017 and 2016. The gross unrealized losses at December 31, 2017 and 2016 were concentrated in U.S. Government and agency obligations and state agency and municipal obligations reflecting interest rate fluctuation. At December 31, 2017, we determined that there had been no deterioration in credit quality subsequent to purchase and believe that all unrealized losses are temporary.$2.0 thousand. All of our investment securities are rated investment grade.grade or deemed to be of investment grade quality.
The following tables summarize the amortized cost and weighted average yield of debt securities in our investment securities portfolio as of December 31, 20172020 and 2016,2019, based on remaining period to contractual maturity. Information for mortgage-backed securities is based on the final contractual maturity dates without considering repayments and prepayments.
| | | | Due Within 1 Year | | | Due 1 – 5 Years | | | Due 5 – 10 Years | | | Due After 10 Years | | ||||||||||||||||||||||||||||||||||||
| At December 31, 2017 | | | Amortized Cost | | | Yield | | | Amortized Cost | | | Yield | | | Amortized Cost | | | Yield | | | Amortized Cost | | | Yield | | ||||||||||||||||||||||||
| | | | (In thousands) | | |||||||||||||||||||||||||||||||||||||||||||||
| Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Government and agency obligations | | | | $ | — | | | | | | —% | | | | | $ | 13,000 | | | | | | 1.90% | | | | | $ | 100 | | | | | | 2.50% | | | | | $ | 59,924 | | | | | | 2.48% | | |
| State agency and municipal obligations | | | | | — | | | | | | — | | | | | | 2,873 | | | | | | 2.70 | | | | | | 7,386 | | | | | | 3.54 | | | | | | 1,700 | | | | | | 3.36 | | |
| Corporate bonds | | | | | — | | | | | | — | | | | | | 7,096 | | | | | | 2.46 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | |
| Total securities available for sale | | | | $ | — | | | | | | —% | | | | | $ | 22,969 | | | | | | 2.17% | | | | | $ | 7,486 | | | | | | 3.53% | | | | | $ | 61,624 | | | | | | 2.50% | | |
| Securities held to maturity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| State agency and municipal obligations | | | | $ | 198 | | | | | | 4.90% | | | | | $ | 3,880 | | | | | | 4.08% | | | | | $ | — | | | | | | —% | | | | | $ | 16,387 | | | | | | 5.03% | | |
| Corporate bonds | | | | | — | | | | | | — | | | | | | 1,000 | | | | | | 2.23 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | |
| Government mortgage-backed securities | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 114 | | | | | | 5.35 | | |
| Total securities held to maturity | | | | $ | 198 | | | | | | 4.90% | | | | | $ | 4,880 | | | | | | 3.70% | | | | | $ | — | | | | | | —% | | | | | $ | 16,501 | | | | | | 5.04% | | |
| | |||||||||||||||||||||||||||||||||||||||||||||||||
| | | | Due Within 1 Year | | | Due 1 – 5 Years | | | Due 5 – 10 Years | | | Due After 10 Years | | ||||||||||||||||||||||||||||||||||||
| At December 31, 2016 | | | Amortized Cost | | | Yield | | | Amortized Cost | | | Yield | | | Amortized Cost | | | Yield | | | Amortized Cost | | | Yield | | ||||||||||||||||||||||||
| | | | (In thousands) | | |||||||||||||||||||||||||||||||||||||||||||||
| Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Government and agency obligations | | | | $ | — | | | | | | —% | | | | | $ | 62,357 | | | | | | 1.99% | | | | | $ | — | | | | | | —% | | | | | $ | 100 | | | | | | 2.50% | | |
| State agency and municipal obligations | | | | | — | | | | | | — | | | | | | 827 | | | | | | 2.68 | | | | | | 8,045 | | | | | | 3.54 | | | | | | 5,623 | | | | | | 4.03 | | |
| Corporate bonds | | | | | 2,022 | | | | | | 4.78 | | | | | | 8,145 | | | | | | 2.43 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | |
| Total securities available for sale | | | | $ | 2,022 | | | | | | 4.78% | | | | | $ | 71,329 | | | | | | 2.05% | | | | | $ | 8,045 | | | | | | 3.54% | | | | | $ | 5,723 | | | | | | 4.00% | | |
| Securities held to maturity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| State agency and municipal obligations | | | | $ | — | | | | | | —% | | | | | $ | 2,135 | | | | | | 3.02% | | | | | $ | — | | | | | | —% | | | | | $ | 13,575 | | | | | | 4.96% | | |
| Corporate bonds | | | | | — | | | | | | — | | | | | | 1,000 | | | | | | 2.00 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | |
| Government mortgage-backed securities | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 149 | | | | | | 5.32 | | |
| Total securities held to maturity | | | | $ | — | | | | | | —% | | | | | $ | 3,135 | | | | | | 2.70% | | | | | $ | — | | | | | | —% | | | | | $ | 13,724 | | | | | | 4.96% | | |
| | |||||||||||||||||||||||||||||||||||||||||||||||||
| Due Within 1 Year | Due 1–5 Years | Due 5–10 Years | Due After 10 Years or No Contractual Maturity | ||||||||||||||||||||||||||||||||||||||||||||
| At December 31, 2020 | Amortized Cost | Yield | Amortized Cost | Yield | Amortized Cost | Yield | Amortized Cost | Yield | |||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Marketable equity securities | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 2,083 | 2.20 | % | |||||||||||||||||||||||||||||||
| Securities available for sale: | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. 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 | % | |||||||||||||||||||||||||||||||
| Securities held to maturity: | |||||||||||||||||||||||||||||||||||||||||||||||
| State agency and municipal obligations | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 16,018 | 5.01 | % | |||||||||||||||||||||||||||||||
| Government mortgage-backed securities | — | — | — | — | — | — | 60 | 5.35 | |||||||||||||||||||||||||||||||||||||||
| Total securities held to maturity | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 16,078 | 5.01 | % | |||||||||||||||||||||||||||||||
| Due Within 1 Year | Due 1–5 Years | Due 5–10 Years | Due After 10 Years or No Contractual Maturity | ||||||||||||||||||||||||||||||||||||||||||||
| At December 31, 2019 | Amortized Cost | Yield | Amortized Cost | Yield | Amortized Cost | Yield | Amortized Cost | Yield | |||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Marketable equity securities | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 2,047 | 2.20 | % | |||||||||||||||||||||||||||||||
| Securities available for sale: | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Government and agency obligations | 2,100 | 1.59 | 9,950 | 2.02 | 8,311 | 2.87 | 60,902 | 2.61 | |||||||||||||||||||||||||||||||||||||||
| Total securities available for sale | $ | 2,100 | 1.59 | % | $ | 9,950 | 2.02 | % | $ | 8,311 | 2.87 | % | $ | 60,902 | 2.61 | % | |||||||||||||||||||||||||||||||
| Securities held to maturity: | |||||||||||||||||||||||||||||||||||||||||||||||
| State agency and municipal obligations | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 16,231 | 5.05 | % | |||||||||||||||||||||||||||||||
| Government mortgage-backed securities | — | — | — | — | — | — | 77 | 5.35 | |||||||||||||||||||||||||||||||||||||||
| Total securities held to maturity | $ | — | — | % | $ | — | — | % | $ | — | —% | $ | 16,308 | 5.05 | % | ||||||||||||||||||||||||||||||||
51
Bank Owned Life Insurance or BOLI("BOLI")
BOLI amounted to $39.6$42.7 million as of December 31, 2017.2020. The purchase of life insurance policies results in an income-earning asset on our consolidated balance sheet that provides monthly tax-free income to us. We expect to benefit from the BOLI contracts as a result of the tax-free growth in cash surrender value and death benefits that are expected to be generated over time. BOLI is included in our Consolidated Balance Sheets at its cash surrender value. Increases in the cash surrender value are reported as a component of noninterest income in our Consolidated Statements of Income.
Deposit Activities and Other Sources of Funds
Our sources of funds include deposits, brokered certificates of deposit, FHLB borrowings, subordinated debt and proceeds from the sales, maturities and payments of loans and investment securities.
Total deposits represented 78%81% of our total assets at December 31, 2017.2020. While scheduled loan and securities repayments are a relatively stable sourcesources of funds, loan and investment security prepayments and deposit inflows are influenced by prevailing interest rates and local economic conditions and are inherently uncertain.
Deposits
We offer a wide variety of deposit products and rates to consumer and business customers consistent with FDIC regulations. Our pricing committeemanagement team meets regularly to determine pricing and marketing initiatives. In addition to being an important source of funding for us, deposits also provide an ongoing stream of fee revenue.
We participate in the Certificate of Deposit Account Registry Service or CDARS, program.("CDARS") and Insured Cash Sweep Service ("ICS") programs. We use CDARS and ICS to place customer funds into certificate of deposit accounts issued byand money market accounts, respectively, into other participating banks. These transactions occur in amounts that are less than FDIC insurance limits to ensure that deposit customers are eligible for FDIC insurance on the full amount of their deposits. Reciprocal amounts of deposits are received from other participating banks that do the same with their customer deposits, and, we also execute one-way buy transactions. CDARS and ICS deposits, except for reciprocal deposits, are considered to be brokered deposits for bank regulatory purposes.
Time deposits may also be generated through the use of a listing service. 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. Interested financial institutions then contact us directly to acquire a time certificate of deposit. There is no third party brokerage service involved in this transaction.
The following table sets forth the composition of our deposits for the dates indicated:
| | | At December 31, | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | 2017 | | 2016 | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | Amount | | Percent | | Weighted Average Rate | | Amount | | Percent | | Weighted Average Rate | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | (Dollars in thousands) | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| At December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amount | Percent | Weighted Average Rate | Amount | Percent | Weighted Average Rate | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noninterest-bearing demand | | | $ | 172,638 | | | | | 12.35% | | | | | —% | | | | $ | 187,593 | | | | | 14.55% | | | | | —% | | | Noninterest-bearing demand | $ | 270,235 | 14.79 | % | — | % | $ | 191,518 | 12.84 | % | — | % | ||||||||||||||||||||||||||||
| NOW | | | | 58,942 | | | | | 4.21 | | | | | 0.16 | | | | | 53,950 | | | | | 4.19 | | | | | 0.19 | | | NOW | 101,737 | 5.57 | 0.17 | 70,020 | 4.69 | 0.21 | ||||||||||||||||||||||||||||||||||
| Money market | | | | 451,804 | | | | | 32.31 | | | | | 0.85 | | | | | 349,131 | | | | | 27.09 | | | | | 0.58 | | | Money market | 669,364 | 36.63 | 0.79 | 419,495 | 28.12 | 1.62 | ||||||||||||||||||||||||||||||||||
| Savings | | | | 83,758 | | | | | 5.99 | | | | | 0.74 | | | | | 96,502 | | | | | 7.48 | | | | | 0.43 | | | Savings | 158,750 | 8.69 | 0.81 | 183,729 | 12.31 | 1.67 | ||||||||||||||||||||||||||||||||||
| Time | | | | 631,263 | | | | | 45.14 | | | | | 1.33 | | | | | 601,861 | | | | | 46.69 | | | | | 1.15 | | | Time | 627,230 | 34.32 | 1.77 | 627,141 | 42.04 | 2.27 | ||||||||||||||||||||||||||||||||||
| Total deposits | | | $ | 1,398,405 | | | | | 100.00% | | | | | 1.06% | | | | $ | 1,289,037 | | | | | 100.00% | | | | | 0.86% | | | Total deposits | $ | 1,827,316 | 100.00 | % | 1.23 | % | $ | 1,491,903 | 100.00 | % | 1.87 | % | ||||||||||||||||||||||||||||
| | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total deposits were $1.4$1.8 billion at December 31, 2017,2020, an increase of $109.4$335.4 million, or 8%22%, from December 31, 2016.2019, 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.
52
At December 31, 20172020 and 2016,2019, time deposits, excludingincluding CDARS and brokered deposits,certificates of deposit, with a denomination of $100 thousand or more totaled $463.3$519.8 million and $438.7$502.8 million, respectively, maturing during the periods indicated in the table below:
| | | December 31, | | |||||||||||||||||||||
| | | 2017 | | 2016 | | |||||||||||||||||||
| | | (Dollars in thousands) | | |||||||||||||||||||||
| At December 31, | ||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Maturing: | | | | | | | | | | | Maturing: | |||||||||||||
| Within 3 months | | | $ | 45,263 | | | | $ | 54,546 | | Within 3 months | $ | 141,784 | $ | 114,636 | |||||||||
| After 3 but within 6 months | | | | 95,989 | | | | | 80,091 | | After 3 but within 6 months | 67,064 | 139,852 | |||||||||||
| After 6 months but within 1 year | | | | 142,380 | | | | | 81,205 | | After 6 months but within 1 year | 118,880 | 104,355 | |||||||||||
| After 1 year | | | | 179,655 | | | | | 222,877 | | | After 1 year | 192,051 | 143,907 | ||||||||||
| Total | | | $ | 463,287 | | | | $ | 438,719 | | Total | $ | 519,779 | $ | 502,750 | |||||||||
| | ||||||||||||||||||||||||
The Bank is a member of the FHLB, which is part of a twelve district Federal Home Loan Bank System. Members are required to own capital stock of the FHLB, and borrowings are collateralized by qualifying assets not otherwise pledged (principally single-family residential mortgage loans and securities).pledged. The maximum amount of credit that the FHLB will extend varies from time to time, depending on its policies and the amount of qualifying collateral the member can pledge. The Bank had satisfied its collateral requirement at December 31, 2017.2020.
We utilize advances from the FHLB as part of our overall funding strategy, to meet short-term liquidity needs and to a lesser degree manage interest rate risk arising from the difference in asset and liability maturities. Total FHLB advances were $199.0$175.0 million at December 31, 20172020 compared to $160.0$150.0 million at December 31, 2016.2019. The increase of $39.0$25.0 million reflects normal fluctuations in our borrowings.
Advances from the FHLB include short-term advances with original maturity dates of one year or less. The following table sets forth certain information concerning short-term FHLB advances as of and for the periods indicated in the following table:
| | | | Year Ended December 31, | | |||||||||||||||
| | | | 2017 | | | 2016 | | | 2015 | | |||||||||
| | | | (Dollars in thousands) | | |||||||||||||||
| As of and for the period ending: | | | | | | | | | | | | | | | | | | | |
| Average amount outstanding during the period | | | | $ | 144,800 | | | | | $ | 114,426 | | | | | $ | 80,248 | | |
| Amount outstanding at end of period | | | | | 174,000 | | | | | | 135,000 | | | | | | 75,000 | | |
| Highest month end balance during the period | | | | | 175,000 | | | | | | 150,000 | | | | | | 101,000 | | |
| Weighted average interest rate at end of period | | | | | 1.44% | | | | | | 0.73% | | | | | | 0.46% | | |
| Weighted average interest rate during the period | | | | | 1.54% | | | | | | 0.69% | | | | | | 0.34% | | |
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Average amount outstanding during the period | $ | 165,232 | $ | 145,921 | $ | 163,419 | |||||||||||
| Amount outstanding at end of period | 175,000 | 150,000 | 135,000 | ||||||||||||||
| Highest month end balance during the period | 175,000 | 150,000 | 174,000 | ||||||||||||||
Weighted average interest rate at end of period(1) | 1.84 | % | 1.93 | % | 2.55 | % | |||||||||||
(1) The table above includes shortCompany's FHLB borrowings are subject to longer term borrowingsswap agreements and the weighted average rate reflects the all in a hedging relationship and excludes oneswap rate under these long term FHLB advance of $25 million maturing in 2020.swap agreements.
On August 19, 2015, the Company completed a private placement of $25.5 million in aggregate principal amount of fixed rate subordinated notes (the “Notes”) to certain institutional investors. The Notes are non-callable for five years, have a stated maturity of August 15, 2025, and bear interest at a quarterly pay fixed rate of 5.75% per annum to the maturity datedate. The Notes became callable, in part or the early redemption date.in whole, beginning August 2020.
Derivative Instruments
The Company uses interest rate swap instruments to fix the interest rate on short termshort-term FHLB borrowings or Brokered CDs, all of which are designated as cash flow hedges. The hedge strategy converts the floating rate of interest on short termshort-term rolling FHLB advances or Brokered CDs to long-term fixed interest rates, thereby protecting the Bank from floating interest rate variability. At December 31, 2017,variability in the contractually specified interest rates.
Derivatives not designated as hedges are not speculative and result from a service the Company held derivative financial instrumentsprovides to certain loan customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a total notional amountthird party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of $150.0 million.
both the customer derivatives and the offsetting derivatives are recognized directly in earnings.53
Information about derivative instruments at December 31, 20172020 and 20162019 was as follows:
December 31, 2017:2020:
| | | | Notional Amount | | | Original Maturity | | | Received | | | Paid | | | Fair Value Asset (Liability) | | |||||||||
| | | | (Dollars in thousands) | | |||||||||||||||||||||
| Cash flow hedge: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate swap on FHLB advance | | | | $ | 25,000 | | | | 4.7 years | | | 3-month LIBOR | | | | | 1.62% | | | | | $ | 62 | | |
| Interest rate swap on FHLB advance | | | | | 25,000 | | | | 5.0 years | | | 3-month LIBOR | | | | | 1.83% | | | | | | 105 | | |
| Interest rate swap on FHLB advance | | | | | 25,000 | | | | 5.0 years | | | 3-month LIBOR | | | | | 1.48% | | | | | | 398 | | |
| Interest rate swap on FHLB advance | | | | | 25,000 | | | | 5.0 years | | | 3-month LIBOR | | | | | 1.22% | | | | | | 793 | | |
| Interest rate swap on FHLB advance | | | | | 25,000 | | | | 7.0 years | | | 3-month LIBOR | | | | | 2.04% | | | | | | 342 | | |
| Interest rate swap on FHLB advance | | | | | 25,000 | | | | 7.0 years | | | 3-month LIBOR | | | | | 2.04% | | | | | | 334 | | |
| | | | | $ | 150,000 | | | | | | | | | | | | | | | | | $ | 2,034 | | |
| | |||||||||||||||||||||||||
| Original Notional Amount | Original Maturity | Maturity Date | Received | Paid | Fair Value Asset (Liability) | ||||||||||||||||||||||||||||||
| (Dollars 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) | ||||||||||||||||||||||||||||||||
Derivatives not designated as hedging instruments:(1) | |||||||||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||||||
| $ | 77,000 | $ | — | ||||||||||||||||||||||||||||||||
| Total Derivatives | $ | 302,000 | $ | (23,567) | |||||||||||||||||||||||||||||||
(1) Represents interest rate swaps with commercial banking customers, which are offset by derivatives with a third party.
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December 31, 2016:2019:
| | | | Notional Amount | | | Original Maturity | | | Received | | | Paid | | | Fair Value Asset (Liability) | | |||||||||
| | | | (Dollars in thousands) | | |||||||||||||||||||||
| Cash flow hedge: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate swap on FHLB advance | | | | $ | 25,000 | | | | 4.7 years | | | 3-month LIBOR | | | | | 1.62% | | | | | $ | (91) | | |
| Interest rate swap on FHLB advance | | | | | 25,000 | | | | 5.0 years | | | 3-month LIBOR | | | | | 1.83% | | | | | | (138) | | |
| Interest rate swap on FHLB advance | | | | | 25,000 | | | | 5.0 years | | | 3-month LIBOR | | | | | 1.48% | | | | | | 249 | | |
| Interest rate swap on FHLB advance | | | | | 25,000 | | | | 5.0 years | | | 3-month LIBOR | | | | | 1.22% | | | | | | 717 | | |
| | | | | $ | 100,000 | | | | | | | | | | | | | | | | | $ | 737 | | |
| | |||||||||||||||||||||||||
| Original Notional Amount | Original Maturity | Maturity Date | Received | Paid | Fair Value Asset (Liability) | ||||||||||||||||||||||||||||||
| (Dollars 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) | ||||||||||||||||||||||||||||||||
Derivatives not designated as hedging instruments:(2) | |||||||||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||||||
| $ | 40,000 | $ | — | ||||||||||||||||||||||||||||||||
| Total Derivatives | $ | 265,000 | $ | (10,691) | |||||||||||||||||||||||||||||||
(1) The effective date of the forward-starting interest rate swaps listed above are January 2, 2020 and August 26, 2020, respectively.
(2) Represents an interest rate swap with a commercial banking customer, which is offset by a derivative with a third party.
Liquidity and Capital Resources
Liquidity Management
Liquidity is defined as the ability to generate sufficient cash flows to meet all present and future funding requirements at reasonable costs. 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. 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. Investment securities designated as available for sale may also be sold in response to short-term or long-term liquidity needs.
The Company’sBank’s liquidity positions areposition is monitored daily by management. The Asset Liability Committee, or ALCO, establishes guidelines to ensure maintenance of prudent levels of liquidity. ALCO reports to the Company’s boardBoard of directors.Directors.
The Bank has a detailed liquidity funding policy and a contingency funding plan that provide for the prompt and comprehensive response to unexpected demands for liquidity. 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
55
Northeast), Zion’s Bank and Zion’sTexas 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 Zion’sACBB, Zion's Bank and ACBB, andTexas Capital Bank, the brokered deposit market.market and national CD listing services.
Capital Resources
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 December 31, 2017,2020, the Bank met all capital adequacy requirements to which it was subject and exceeded the regulatory minimum capital levels to be considered well-capitalized under the regulatory framework for prompt corrective action.framework. At December 31, 2017,2020, the Bank’s ratio of total common equity tier 1 capital to risk-weighted assets was 10.99%11.06%, total capital to risk-weighted assets was 12.19%12.28%, Tier 1 capital to risk-weighted assets was 10.99%11.06% and Tier 1 capital to average assets was 9.61%8.44%.
The Basel III Capital Rules establish a new comprehensiveminimum Common Equity Tier 1 capital frameworkrequirement of U.S. banking organizations. Under the rules, effective January 1, 2015 for the Company and Bank,4.5% of risk-weighted assets; set the minimum capital ratios became a) 4.5% “Common Equityleverage ratio at 4.0% of total assets; increased the minimum Tier 1”1 capital to risk-weighted assets b)requirement from 4.0% to 6.0% Tier 1; 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 c) 8.0% totalto 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 to risk-weighted assets. In addition,requirements unless a one-time opt-out is exercised. The Bank did exercise its opt-out option and will excludes the new regulations imposedunrealized 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 limitations on dividends, share buy-backs, discretionary bonus payments on Tier 1 instruments and discretionary bonuses to executive officers if the banking organization does not maintainhold a capital“capital conservation buffer for regulatory risk based capital ratios in an amount greater thanbuffer” of 2.5% of its risk-weighted assets, in addition to the amount needed to meet its minimum risk-basedrisk based capital requirements,requirement. The “capital conservation buffer” was phased in over a 5 year period until January 1, 2019. The conservation buffer will be phased in incrementally, starting at 0.625% onfrom January 1, 2016 and increased to 1.25% on January 1, 2017, 1.875% on January 1, 2018 and 2.5% on January 1, 2019. Accordingly, while these rules started to be phased in on January 1, 2015 (and2019, when the full capital conservation buffer on January 1, 2016), the Company believes it is well positionedbecame effective.
Failure to meet theminimum capital requirements as they become effective.
Contractual Obligations
The following table summarizes our contractual obligations to make future payments as of December 31, 2017.2020. Payments for borrowings do not include interest. Payments related to leases are based on actual payments specified in the underlying contracts.
| | | | Payments Due by Period | | |||||||||||||||||||||||||||
| | | | Total | | | Less Than 1 Year | | | 1 – 3 Years | | | 4 – 5 Years | | | After 5 Years | | |||||||||||||||
| | | | (in thousands) | | |||||||||||||||||||||||||||
| Contractual Obligations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| FHLB advances | | | | $ | 199,000 | | | | | $ | 174,000 | | | | | $ | 25,000 | | | | | $ | — | | | | | $ | — | | |
| Subordinated Debt | | | | | 25,500 | | | | | | — | | | | | | — | | | | | | — | | | | | | 25,500 | | |
| Operating lease agreements | | | | | 21,723 | | | | | | 1,808 | | | | | | 3,440 | | | | | | 2,498 | | | | | | 13,977 | | |
| Time deposits with stated maturity dates | | | | | 631,263 | | | | | | 391,509 | | | | | | 238,849 | | | | | | 905 | | | | | | — | | |
| Total contractual obligations | | | | $ | 877,486 | | | | | $ | 567,317 | | | | | $ | 267,289 | | | | | $ | 3,403 | | | | | $ | 39,477 | | |
| | |||||||||||||||||||||||||||||||
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| Payments Due by Period | |||||||||||||||||||||||||||||
| Total | Less Than 1 Year | 1–3 Years | 4–5 Years | After 5 Years | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Contractual Obligations: | |||||||||||||||||||||||||||||
| FHLB advances | $ | 175,000 | $ | 175,000 | $ | — | $ | — | $ | — | |||||||||||||||||||
| Subordinated debt | 25,500 | — | — | 25,500 | — | ||||||||||||||||||||||||
| Operating lease agreements | 22,929 | 1,826 | 2,389 | 1,488 | 17,226 | ||||||||||||||||||||||||
| Time deposits with stated maturity dates | 627,230 | 418,117 | 178,920 | 30,193 | — | ||||||||||||||||||||||||
| Total contractual obligations | $ | 850,659 | $ | 594,943 | $ | 181,309 | $ | 57,181 | $ | 17,226 | |||||||||||||||||||
Off-Balance Sheet InstrumentsArrangements
In the normal course of business, we are a party to financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the financial statements. The contractual amounts of these instruments reflect the extent of involvement we have in particular classes of financial instruments.
We enter into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of the Bank’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. The Bank minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.
Commitments to extend credit totaled $200.3$237.1 million and $168.4$189.7 million, respectively at December 31, 20172020 and 2016.2019. The following table summarizes our commitments to extend credit as of the dates indicated. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements. In addition, borrowers may be required to meet certain performance requirements to continue to draw on these commitments. We manage our liquidity in light of the aggregate amounts of commitments to extend credit and outstanding standby letters of credit in effect from time to time to ensure that we will have adequate sources of liquidity to fund such commitments and honor drafts under such letters of credit.
| | | | Amount of Commitment Expiration per Period | | |||||||||||||||||||||||||||
| | | | Total | | | Less Than 1 Year | | | 1 – 3 Years | | | 4 – 5 Years | | | After 5 Years | | |||||||||||||||
| | | | (in thousands) | | |||||||||||||||||||||||||||
| Other Commitments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loan commitments | | | | $ | 112,649 | | | | | $ | 39,298 | | | | | $ | 35,372 | | | | | $ | 3,708 | | | | | $ | 34,271 | | |
| Undisbursed construction loans | | | | | 80,064 | | | | | | 17,569 | | | | | | 6,441 | | | | | | 24,876 | | | | | | 31,178 | | |
| Unused home equity lines of credit | | | | | 7,573 | | | | | | 365 | | | | | | 295 | | | | | | 343 | | | | | | 6,570 | | |
| Total other commitments | | | | $ | 200,286 | | | | | $ | 57,232 | | | | | $ | 42,108 | | | | | $ | 28,927 | | | | | $ | 72,019 | | |
| | |||||||||||||||||||||||||||||||
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As of December 31, 20162020
| | | Amount of Commitment Expiration per Period | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | Total | | Less Than 1 Year | | 1 – 3 Years | | 4 – 5 Years | | After 5 Years | | |||||||||||||||||||||||||||||||||||||||||||||||||
| | | (in thousands) | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amount of Commitment Expiration per Period | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | Less Than 1 Year | 1–3 Years | 4–5 Years | After 5 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other Commitments: | | | | | | | | | | | | | | | | | | | | | | | | | | Other Commitments: | ||||||||||||||||||||||||||||||||||
| Loan commitments | | | $ | 89,825 | | | | $ | 32,418 | | | | $ | 37,681 | | | | $ | 3,601 | | | | $ | 16,125 | | Loan commitments | $ | 114,574 | $ | 70,958 | $ | 18,447 | $ | 17,030 | $ | 8,139 | ||||||||||||||||||||||||
| Undisbursed construction loans | | | | 70,526 | | | | | 17,878 | | | | | 18,167 | | | | | 6,211 | | | | | 28,270 | | Undisbursed construction loans | 117,457 | 9,862 | 40,635 | 14,599 | 52,361 | |||||||||||||||||||||||||||||
| Unused home equity lines of credit | | | | 8,083 | | | | | 367 | | | | | 33 | | | | | 456 | | | | | 7,227 | | | Unused home equity lines of credit | 5,029 | 250 | 210 | — | 4,569 | ||||||||||||||||||||||||||||
| Total other commitments | | | $ | 168,434 | | | | $ | 50,663 | | | | $ | 55,881 | | | | $ | 10,268 | | | | $ | 51,622 | | Total other commitments | $ | 237,060 | $ | 81,070 | $ | 59,292 | $ | 31,629 | $ | 65,069 | ||||||||||||||||||||||||
| | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
As of December 31, 2019
| Amount of Commitment Expiration per Period | |||||||||||||||||||||||||||||
| Total | Less Than 1 Year | 1–3 Years | 4–5 Years | After 5 Years | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Other Commitments: | |||||||||||||||||||||||||||||
| Loan commitments | $ | 102,986 | $ | 56,483 | $ | 12,628 | $ | 15,166 | $ | 18,709 | |||||||||||||||||||
| Undisbursed construction loans | 80,472 | 1,715 | 26,281 | 15,340 | 37,136 | ||||||||||||||||||||||||
| Unused home equity lines of credit | 6,284 | 368 | 200 | 10 | 5,706 | ||||||||||||||||||||||||
| Total other commitments | $ | 189,742 | $ | 58,566 | $ | 39,109 | $ | 30,516 | $ | 61,551 | |||||||||||||||||||
Recently Issued Accounting Pronouncements
See Note 1 to our Consolidated Financial Statements for details of recently issued accounting pronouncements and their expected impact on our financial statements.
Item 7a.
7A. Quantitative and Qualitative Disclosures About Market Risk
Asset/Liability Management and Interest Rate Risk
We measure interest rate risk using simulation analysis to calculate earnings and equity at risk. These risk measures are quantified using simulation software from one of the leading firms in the field of asset/liability modeling. Key assumptions relate to the behavior of interest rates and spreads, prepayment speeds and the run-off of deposits. From such simulations, interest rate risk, or IRR, is quantified and appropriate strategies are formulated and implemented. We model IRR by using two primary risk measurement techniques: simulation of net interest income and simulation of economic value of equity. These two measurements are complementary and provide both short-term and long-term risk profiles for the Company. Because both base linebaseline simulations assume that our balance sheet will remain static over the simulation horizon, the results do not reflect adjustments in strategy that ALCO could implement in response to rate shifts. The simulation analyses are updated quarterly based on data obtained one month prior to quarter end. The Company believes the one month lag has no material impact to the sensitivities presented.quarterly.
We use a net interest income at risk simulation to measure the sensitivity of net interest income to changes in market rates. This simulation captures underlying product behaviors, such as asset and liability repricing dates, balloon dates, interest rate indices and spreads, rate caps and floors, as well as other behavioral attributes. The simulation of net interest income also requires a number of key assumptions such as: (i) prepayment projections for loans and securities that are projected under each interest rate scenario using internal and external mortgage analytics; (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. 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.
We use two sets of standard scenarios to measure net interest income at risk. For the “core” scenario,Parallel Ramp Scenarios, rate changes are ramped over a twelve-month horizon based upon a parallel yield curve shift and then maintained at those levels over the remainder of the simulation horizon. Parallel shock scenariosShock Scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. 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: 6% for a 100 basis point shift; 12% for a 200 basis point shift; and 18% for a 300 basis point shift.
58
shift. 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 December 31, 2020, 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 December 31, 20172020 and 2016:2019:
Parallel Ramp
| | | | Estimated Percent Change in Net Interest Income | | |||||||||
| | | | At December 31, | | |||||||||
| Rate Changes (basis points) | | | 2017 | | | 2016 | | ||||||
| -100 | | | | | (2.00)% | | | | | | (1.60)% | | |
| +200 | | | | | (4.30) | | | | | | (2.23) | | |
| Estimated Percent Change in Net Interest Income | ||||||||||||||
| At December 31, | ||||||||||||||
| Rate Changes (basis points) | 2020 | 2019 | ||||||||||||
| (100) | 0.20 | % | 3.00 | % | ||||||||||
| 200 | (1.40) | (6.80) | ||||||||||||
Parallel Shock
| | | | Estimated Percent Change in Net Interest Income | | |||||||||
| | | | At December 31, | | |||||||||
| Rate Changes (basis points) | | | 2017 | | | 2016 | | ||||||
| -100 | | | | | (4.70)% | | | | | | (3.36)% | | |
| +100 | | | | | (3.40) | | | | | | (1.86) | | |
| +200 | | | | | (7.30) | | | | | | (4.13) | | |
| +300 | | | | | (11.50) | | | | | | (6.78) | | |
| Estimated Percent Change in Net Interest Income | ||||||||||||||
| At December 31, | ||||||||||||||
| Rate Changes (basis points) | 2020 | 2019 | ||||||||||||
| (100) | (0.30) | % | 5.00 | % | ||||||||||
| 100 | (1.00) | (6.20) | ||||||||||||
| 200 | (1.70) | (12.90) | ||||||||||||
| 300 | (2.00) | (19.50) | ||||||||||||
The net interest income at risk simulation results indicate that, as of December 31, 2017,2020, 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.
We conduct an economic value of equity at risk simulation in tandem with net interest income simulations, to ascertain a longer termlonger-term view of our interest rate risk position by capturing longer-term re-pricing risk and options risk embedded in the balance sheet. It measures the sensitivity of economic value of equity to changes in interest rates. Economic value of equity at risk simulation values only the current balance sheet and does not incorporate the growth assumptions used in one of the income simulations. As with the net interest income simulation, this simulation captures product characteristics such as loan resets, repricing terms, maturity dates, rate caps and floors. Key assumptions include loan prepayment speeds, deposit pricing elasticity and non-maturity deposit attrition rates. These assumptions can have significant impacts on valuation results as the assumptions remain in effect for the entire life of each asset and liability. All key assumptions are subject to a periodic review.
Base case economic value of equity at risk is calculated by estimating the net present value of all future cash flows from existing assets and liabilities using current interest rates. The base case scenario assumes that future interest rates remain unchanged. Internal policy for economic value of equity at risk simulations should not decline more than 10% for a 100 basis point shift; 20% for a 200 basis point shift; and 30% for a 300 basis point shift. Per Company policy, the Bank should not be outside these limits unless the Banks forecasted capital ratios are considered to be "well capitalized".
The following table sets forth the estimated percentage change in our economic value of equity at risk, assuming various shifts in interest rates:
Parallel Shock
| | | | Estimated Percent Change in Economic Value of Equity | | |||||||||
| | | | At December 31, | | |||||||||
| Rate Changes (basis points) | | | 2017 | | | 2016 | | ||||||
| -100 | | | | | (1.60)% | | | | | | 0.00% | | |
| +100 | | | | | (10.10) | | | | | | (9.90) | | |
| +200 | | | | | (22.90) | | | | | | (21.70) | | |
| +300 | | | | | (32.80) | | | | | | (31.30) | | |
| Estimated Percent Change in Economic Value of Equity | ||||||||||||||
| At December 31, | ||||||||||||||
| Rate Changes (basis points) | 2020 | 2019 | ||||||||||||
| (100) | (47.30) | % | (2.00) | % | ||||||||||
| 100 | 9.30 | (6.50) | ||||||||||||
| 200 | 13.80 | (17.20) | ||||||||||||
| 300 | 18.40 | (25.50) | ||||||||||||
While ALCO reviews and updates simulation assumptions and also periodically back-tests the simulation results to ensure that the assumptions are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk or future net interest margin. Over time, the repricing, maturity and prepayment characteristics of financial instruments
59
and the composition of our balance sheet may change to a different degree than estimated. Due to the low current level of market interest rates, the banking industry has experienced relatively strong growth in low-cost FDIC insured core deposits over the past several years. ALCO recognizes that a portion of these increased levels of low-costdeposit balances could shift into higher yielding alternatives in the future, particularly if interestas market rates rise and as confidence in financial markets strengthens, andchange. ALCO has modeled increased amountscosts of deposit shifts out of these low-cost categories into higher-cost alternativesdeposits in the rising rate simulation scenarios presented above. In the minus 100 scenario above, the change in EVE of (47.3)% is outside of policy parameters. However, because the Bank continues to be well-capitalized, the downward rate scenarios is extremely unlikely in the current economic and interest rate environment. The result of this simulation was discussed with the ALCO committee and the Company has decided to not take any further action at this time.
It should be noted that the static balance sheet assumption does not necessarily reflect our expectation for future balance sheet growth, which is a function of the business environment and customer behavior. Another significant simulation assumption is the sensitivity of core deposits to fluctuations in interest rates. Income simulation results assume that changes in both core savings deposit rates and balances are related to changes in short-term interest rates. Lastly, mortgage-backed securities and mortgage loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments. Such changes could affect the level of reinvestment risk associated with cash flow from these instruments, as well as their market value. Changes in prepayment speeds could also increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income.
Impact of Inflation
Our financial statements and related data contained in this annual report have been prepared in accordance with GAAP, which require the measure of financial position and operating results in terms of historic dollars, without considering changes in the relative purchasing power of money over time due to inflation.
Inflation generally increases the costs of funds and operating overhead, and to the extent loans and other assets bear variable rates, the yields on such assets.assets fluctuate accordingly. Unlike the assets and liabilities of most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant effect on the performance of a financial institution than the effects of general levels of inflation. In addition, inflation affects a financial institution’s cost of goods and services purchased, the cost of salaries and benefits, occupancy expense and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings and shareholders’ equity.
60
Item 8.
Financial Statements and Supplementary Data
The financial statements and supplementary data required by this item are presented in the order shown below:
Consolidated Statements of Income for the years ended December 31, 2017, 20162020, 2019 and 2015
2018
2018
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2017, 20162020, 2019 and 2015
2018
2018
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 20162020, 2019 and 2015
2018
2018
61
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors
of Bankwell Financial Group, Inc.
of Bankwell Financial Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetsheets of Bankwell Financial Group, Inc. and its subsidiaries (the Company) as of December 31, 2017,2020 and 2019, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the yearthree years in the period ended December 31, 2017,2020, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017,2020 and 2019, and the results of its operations and its cash flows for each of the yearthree years in the period ended December 31, 2017,2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit.audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditaudits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our auditaudits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our auditaudits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our auditaudits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit providesaudits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Qualitative Factor Adjustments to the Allowance for Loan Losses
As described in Notes 1 and 5 to the consolidated financial statements, the Company’s allowance for loan losses totaled $21.0 million as of December 31, 2020, which consists of a general reserve of $16.0 million and a specific reserve of $5.0 million. Management estimates the allowance based on loan losses believed to be inherent in the Company’s loan portfolio, segmented by product type and risk classification, at the balance sheet date. The Company’s allowance for loan losses consists of a general reserve, which management develops based on historical loss ratios from its data and, where appropriate, its peers’ data adjusted for qualitative factors not reflected in the historical loss experience as well as a specific reserve based on management’s identification of impaired loans. Management considers several qualitative factors, both internal and external to the Company, including valuation of underlying collateral; macro and local economic factors; nature and volume of loan portfolio; concentration of credit risk; net charge-off trends and non-accrual trends, and past due and classified loan trends when determining the general reserve. The adjustment for qualitative factors requires a significant amount of judgment by management and involves a high degree of estimation uncertainty.
We identified the qualitative factor component of the allowance for loan losses as a critical audit matter as auditing the underlying qualitative factors required significant auditor judgment as amounts determined by management rely on analysis that is highly subjective and includes significant estimation uncertainty.
62
Our audit procedures related to the qualitative factor component of the allowance for loan losses include the following, among others:
•We obtained an understanding of the relevant controls related to management’s qualitative factor adjustments to the allowance for loan losses and tested such controls for design and operating effectiveness including controls related to management’s establishment, review and approval of the qualitative factors and the completeness and accuracy of data used in determining the qualitative factors.
•We tested the completeness and accuracy of data used by management in determining qualitative factor adjustments by agreeing them to internal and external source data.
•We assessed the reasonableness of management’s qualitative factor adjustments, including macro and local economic factors, nature and volume of loan portfolio, concentration of credit risk, net charge-off trends and non-accrual trends, and past due and classified loan trends by agreeing them to internal and external source data, evaluating the magnitude and directional consistency of such adjustments with prior periods and data points, and evaluating the consistency of such changes in accordance with the Company’s loan policy.
•We tested management’s conclusions regarding the appropriateness of the qualitative factor adjustments and agreed the impact to the allowance for loan losses calculation.
/s/ RSM US LLP
We have served as the Company’s auditor since 2017.
New Haven, Connecticut
March 30, 201810, 2021
63
Bankwell Financial Group, Inc.
Consolidated Balance Sheets
(Dollars inIn thousands, except share data)
| | | | December 31, | | |||||||||
| | | | 2017 | | | 2016 | | ||||||
| ASSETS | | | | | | | | | | | | | |
| Cash and due from banks | | | | $ | 70,545 | | | | | $ | 96,026 | | |
| Federal funds sold | | | | | 186 | | | | | | 329 | | |
| Cash and cash equivalents | | | | | 70,731 | | | | | | 96,355 | | |
| Available for sale investment securities, at fair value | | | | | 92,188 | | | | | | 87,751 | | |
| Held to maturity investment securities, at amortized cost | | | | | 21,579 | | | | | | 16,859 | | |
| Loans held for sale | | | | | — | | | | | | 254 | | |
| Loans receivable (net of allowance for loan losses of $18,904 and $17,982 at December 31, 2017 and 2016, respectively) | | | | | 1,520,879 | | | | | | 1,343,895 | | |
| Foreclosed real estate | | | | | — | | | | | | 272 | | |
| Accrued interest receivable | | | | | 5,910 | | | | | | 4,958 | | |
| Federal Home Loan Bank stock, at cost | | | | | 9,183 | | | | | | 7,943 | | |
| Premises and equipment, net | | | | | 18,196 | | | | | | 17,835 | | |
| Bank-owned life insurance | | | | | 39,618 | | | | | | 33,448 | | |
| Goodwill | | | | | 2,589 | | | | | | 2,589 | | |
| Other intangible assets | | | | | 382 | | | | | | 501 | | |
| Deferred income taxes, net | | | | | 4,904 | | | | | | 9,085 | | |
| Other assets | | | | | 10,448 | | | | | | 7,174 | | |
| Total assets | | | | $ | 1,796,607 | | | | | $ | 1,628,919 | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | |
| Deposits | | | | | | | | | | | | | |
| Noninterest bearing deposits | | | | $ | 172,638 | | | | | $ | 187,593 | | |
| Interest bearing deposits | | | | | 1,225,767 | | | | | | 1,101,444 | | |
| Total deposits | | | | | 1,398,405 | | | | | | 1,289,037 | | |
| Advances from the Federal Home Loan Bank | | | | | 199,000 | | | | | | 160,000 | | |
| Subordinated debentures | | | | | 25,103 | | | | | | 25,051 | | |
| Accrued expenses and other liabilities | | | | | 13,072 | | | | | | 8,936 | | |
| Total liabilities | | | | | 1,635,580 | | | | | | 1,483,024 | | |
| Commitments and contingencies (Note 12) | | | | | — | | | | | | — | | |
| Shareholders’ equity | | | | | | | | | | | | | |
| Common stock, no par value; 10,000,000 shares authorized, 7,751,424 and 7,620,663 shares issued and outstanding at December 31, 2017 and 2016, respectively | | | | | 118,301 | | | | | | 115,353 | | |
| Retained earnings | | | | | 41,032 | | | | | | 29,652 | | |
| Accumulated other comprehensive income | | | | | 1,694 | | | | | | 890 | | |
| Total shareholders’ equity | | | | | 161,027 | | | | | | 145,895 | | |
| Total liabilities and shareholders’ equity | | | | $ | 1,796,607 | | | | | $ | 1,628,919 | | |
| | |||||||||||||
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| ASSETS | |||||||||||
| Cash and due from banks | $ | 405,340 | $ | 78,051 | |||||||
| Federal funds sold | 4,258 | 0 | |||||||||
| Cash and cash equivalents | 409,598 | 78,051 | |||||||||
| Investment securities | |||||||||||
| Marketable equity securities, at fair value | 2,207 | 2,118 | |||||||||
| Available for sale investment securities, at fair value | 88,605 | 82,439 | |||||||||
| Held to maturity investment securities, at amortized cost (fair values of $20,032 and $18,307 at December 31, 2020 and 2019, respectively) | 16,078 | 16,308 | |||||||||
| Total investment securities | 106,890 | 100,865 | |||||||||
| Loans receivable (net of allowance for loan losses of $21,009 and $13,509 at December 31, 2020 and 2019, respectively) | 1,601,672 | 1,588,840 | |||||||||
| Accrued interest receivable | 6,579 | 5,959 | |||||||||
| Federal Home Loan Bank stock, at cost | 7,860 | 7,475 | |||||||||
| Premises and equipment, net | 21,762 | 28,522 | |||||||||
| Bank-owned life insurance | 42,651 | 41,683 | |||||||||
| Goodwill | 2,589 | 2,589 | |||||||||
| Other intangible assets | 76 | 214 | |||||||||
| Deferred income taxes, net | 11,300 | 5,788 | |||||||||
| Other assets | 42,770 | 22,196 | |||||||||
| Total assets | $ | 2,253,747 | $ | 1,882,182 | |||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Liabilities | |||||||||||
| Deposits | |||||||||||
| Noninterest bearing deposits | $ | 270,235 | $ | 191,518 | |||||||
| Interest bearing deposits | 1,557,081 | 1,300,385 | |||||||||
| Total deposits | 1,827,316 | 1,491,903 | |||||||||
| Advances from the Federal Home Loan Bank | 175,000 | 150,000 | |||||||||
| Subordinated debentures ($25,500 face, less unamortized debt issuance costs of $242 and $293 at December 31, 2020 and 2019, respectively) | 25,258 | 25,207 | |||||||||
| Accrued expenses and other liabilities | 49,571 | 32,675 | |||||||||
| Total liabilities | 2,077,145 | 1,699,785 | |||||||||
| Commitments and contingencies (Note 12) | 0 | 0 | |||||||||
| Shareholders’ equity | |||||||||||
| Common stock, 0 par value; 10,000,000 shares authorized, 7,919,278 and 7,868,803 shares issued and outstanding at December 31, 2020 and 2019, respectively | 121,338 | 120,589 | |||||||||
| Retained earnings | 70,839 | 69,324 | |||||||||
| Accumulated other comprehensive loss | (15,575) | (7,516) | |||||||||
| Total shareholders’ equity | 176,602 | 182,397 | |||||||||
| Total liabilities and shareholders’ equity | $ | 2,253,747 | $ | 1,882,182 | |||||||
See Notes to Consolidated Financial Statements
64
Bankwell Financial Group, Inc.
Consolidated Statements of Income
(Dollars inIn thousands, except per share amounts)
| | | | Year Ended December 31, | | |||||||||||||||
| | | | 2017 | | | 2016 | | | 2015 | | |||||||||
| Interest and dividend income | | | | | | | | | | | | | | | | | | | |
| Interest and fees on loans | | | | $ | 66,841 | | | | | $ | 58,077 | | | | | $ | 48,692 | | |
| Interest and dividends on securities | | | | | 3,570 | | | | | | 2,740 | | | | | | 1,964 | | |
| Interest on cash and cash equivalents | | | | | 790 | | | | | | 173 | | | | | | 98 | | |
| Total interest and dividend income | | | | | 71,201 | | | | | | 60,990 | | | | | | 50,754 | | |
| Interest expense | | | | | | | | | | | | | | | | | | | |
| Interest expense on deposits | | | | | 12,694 | | | | | | 8,300 | | | | | | 5,681 | | |
| Interest on borrowings | | | | | 4,143 | | | | | | 3,598 | | | | | | 2,285 | | |
| Total interest expense | | | | | 16,837 | | | | | | 11,898 | | | | | | 7,966 | | |
| Net interest income | | | | | 54,364 | | | | | | 49,092 | | | | | | 42,788 | | |
| Provision for loan losses | | | | | 1,341 | | | | | | 3,914 | | | | | | 3,230 | | |
| Net interest income after provision for loan losses | | | | | 53,023 | | | | | | 45,178 | | | | | | 39,558 | | |
| Noninterest income | | | | | | | | | | | | | | | | | | | |
| Gains and fees from sales of loans | | | | | 1,427 | | | | | | 466 | | | | | | 1,113 | | |
| Bank owned life insurance | | | | | 1,170 | | | | | | 693 | | | | | | 727 | | |
| Service charges and fees | | | | | 1,007 | | | | | | 963 | | | | | | 933 | | |
| Gain (Loss) on sale of available for sale securities, net | | | | | 165 | | | | | | (115) | | | | | | — | | |
| (Loss) Gain on sale of foreclosed real estate | | | | | (78) | | | | | | 128 | | | | | | — | | |
| Other | | | | | 938 | | | | | | 541 | | | | | | 711 | | |
| Total noninterest income | | | | | 4,629 | | | | | | 2,676 | | | | | | 3,484 | | |
| Noninterest expense | | | | | | | | | | | | | | | | | | | |
| Salaries and employee benefits | | | | | 16,284 | | | | | | 15,655 | | | | | | 15,736 | | |
| Occupancy and equipment | | | | | 6,165 | | | | | | 5,811 | | | | | | 5,341 | | |
| Professional services | | | | | 2,072 | | | | | | 1,654 | | | | | | 1,447 | | |
| Data processing | | | | | 1,866 | | | | | | 1,603 | | | | | | 1,523 | | |
| Marketing | | | | | 1,193 | | | | | | 948 | | | | | | 985 | | |
| FDIC insurance | | | | | 1,116 | | | | | | 660 | | | | | | 672 | | |
| Director fees | | | | | 912 | | | | | | 859 | | | | | | 951 | | |
| Amortization of intangibles | | | | | 118 | | | | | | 151 | | | | | | 196 | | |
| Foreclosed real estate | | | | | 70 | | | | | | 157 | | | | | | 168 | | |
| Merger and acquisition related expenses | | | | | — | | | | | | — | | | | | | 2 | | |
| Other | | | | | 2,727 | | | | | | 2,046 | | | | | | 2,150 | | |
| Total noninterest expense | | | | | 32,523 | | | | | | 29,544 | | | | | | 29,171 | | |
| Income before income tax expense | | | | | 25,129 | | | | | | 18,310 | | | | | | 13,871 | | |
| Income tax expense | | | | | 11,299 | | | | | | 5,960 | | | | | | 4,841 | | |
| Net income | | | | $ | 13,830 | | | | | $ | 12,350 | | | | | $ | 9,030 | | |
| Net income attributable to common shareholders | | | | $ | 13,830 | | | | | $ | 12,350 | | | | | $ | 8,905 | | |
| Earnings Per Common Share: | | | | | | | | | | | | | | | | | | | |
| Basic | | | | $ | 1.80 | | | | | $ | 1.64 | | | | | $ | 1.23 | | |
| Diluted | | | | $ | 1.78 | | | | | $ | 1.62 | | | | | $ | 1.21 | | |
| Weighted Average Common Shares Outstanding: | | | | | | | | | | | | | | | | | | | |
| Basic | | | | | 7,572,409 | | | | | | 7,396,019 | | | | | | 7,071,550 | | |
| Diluted | | | | | 7,670,413 | | | | | | 7,491,052 | | | | | | 7,140,558 | | |
| Dividends per common share | | | | $ | 0.28 | | | | | $ | 0.22 | | | | | $ | 0.05 | | |
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Interest and dividend income | |||||||||||||||||
| Interest and fees on loans | $ | 73,665 | $ | 77,339 | $ | 74,715 | |||||||||||
| Interest and dividends on securities | 3,237 | 3,750 | 3,921 | ||||||||||||||
| Interest on cash and cash equivalents | 585 | 1,859 | 1,428 | ||||||||||||||
| Total interest and dividend income | 77,487 | 82,948 | 80,064 | ||||||||||||||
| Interest expense | |||||||||||||||||
| Interest expense on deposits | 18,180 | 24,698 | 18,951 | ||||||||||||||
| Interest expense on borrowings | 4,472 | 4,489 | 4,787 | ||||||||||||||
| Total interest expense | 22,652 | 29,187 | 23,738 | ||||||||||||||
| Net interest income | 54,835 | 53,761 | 56,326 | ||||||||||||||
| Provision for loan losses | 7,605 | 437 | 3,440 | ||||||||||||||
| Net interest income after provision for loan losses | 47,230 | 53,324 | 52,886 | ||||||||||||||
| Noninterest income | |||||||||||||||||
| Bank owned life insurance | 967 | 1,008 | 1,057 | ||||||||||||||
| Service charges and fees | 788 | 1,023 | 1,090 | ||||||||||||||
| Gains and fees from sales of loans | 43 | 1,791 | 984 | ||||||||||||||
| Gain (loss) on sale of other real estate owned, net | 19 | (102) | 0 | ||||||||||||||
| Net gain on sale of available for sale securities | 0 | 76 | 222 | ||||||||||||||
| Other | 1,067 | 1,448 | 547 | ||||||||||||||
| Total noninterest income | 2,884 | 5,244 | 3,900 | ||||||||||||||
| Noninterest expense | |||||||||||||||||
| Salaries and employee benefits | 21,355 | 19,434 | 18,973 | ||||||||||||||
| Occupancy and equipment | 10,926 | 7,594 | 6,790 | ||||||||||||||
| Data processing | 3,216 | 2,067 | 2,033 | ||||||||||||||
| Professional services | 2,110 | 1,857 | 2,103 | ||||||||||||||
| Director fees | 1,214 | 863 | 1,044 | ||||||||||||||
| FDIC insurance | 791 | 74 | 779 | ||||||||||||||
| Marketing | 630 | 971 | 1,587 | ||||||||||||||
| Other | 2,571 | 2,766 | 2,324 | ||||||||||||||
| Total noninterest expense | 42,813 | 35,626 | 35,633 | ||||||||||||||
| Income before income tax expense | 7,301 | 22,942 | 21,153 | ||||||||||||||
| Income tax expense | 1,397 | 4,726 | 3,720 | ||||||||||||||
| Net income | $ | 5,904 | $ | 18,216 | $ | 17,433 | |||||||||||
| Earnings Per Common Share: | |||||||||||||||||
| Basic | $ | 0.75 | $ | 2.32 | $ | 2.23 | |||||||||||
| Diluted | $ | 0.75 | $ | 2.31 | $ | 2.21 | |||||||||||
| Weighted Average Common Shares Outstanding: | |||||||||||||||||
| Basic | 7,728,328 | 7,757,355 | 7,722,175 | ||||||||||||||
| Diluted | 7,748,453 | 7,784,631 | 7,775,480 | ||||||||||||||
| Dividends per common share | $ | 0.56 | $ | 0.52 | $ | 0.48 | |||||||||||
See Notes to Consolidated Financial Statements
65
Bankwell Financial Group, Inc.
Consolidated Statements of Comprehensive (Loss) Income
(In thousands)
| | | | Year Ended December 31, | | |||||||||||||||
| | | | 2017 | | | 2016 | | | 2015 | | |||||||||
| Net income | | | | $ | 13,830 | | | | | $ | 12,350 | | | | | $ | 9,030 | | |
| Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | |
| Unrealized (losses) gains on securities: | | | | | | | | | | | | | | | | | | | |
| Unrealized holding losses on available for sale securities | | | | | (357) | | | | | | (109) | | | | | | (431) | | |
| Reclassification adjustment for (gain) loss realized in net income | | | | | (165) | | | | | | 115 | | | | | | — | | |
| Net change in unrealized (loss) gain | | | | | (522) | | | | | | 6 | | | | | | (431) | | |
| Income tax effect – benefit (expense) | | | | | 182 | | | | | | (2) | | | | | | 192 | | |
| Unrealized (losses) gains on securities, net of tax | | | | | (340) | | | | | | 4 | | | | | | (239) | | |
| Unrealized gains (losses) on interest rate swaps: | | | | | | | | | | | | | | | | | | | |
| Unrealized gain (losses) on interest rate swaps designated as cash flow hedges | | | | | 1,297 | | | | | | 1,013 | | | | | | (89) | | |
| Tax effect – (expense) benefit | | | | | (454) | | | | | | (354) | | | | | | 24 | | |
| Unrealized gains (losses) on interest rate swaps, net of tax | | | | | 843 | | | | | | 659 | | | | | | (65) | | |
| Total other comprehensive income (loss), net of tax | | | | | 503 | | | | | | 663 | | | | | | (304) | | |
| Comprehensive income | | | | $ | 14,333 | | | | | $ | 13,013 | | | | | $ | 8,726 | | |
| | |||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Net income | $ | 5,904 | $ | 18,216 | $ | 17,433 | |||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||
| Unrealized gains (losses) on securities: | |||||||||||||||||
| Unrealized holding gains (losses) on available for sale securities | 2,355 | 2,997 | (1,632) | ||||||||||||||
| Reclassification adjustment for gains realized in net income | 0 | (76) | (222) | ||||||||||||||
| Net change in unrealized gains (losses) | 2,355 | 2,921 | (1,854) | ||||||||||||||
| Income tax (expense) benefit | (539) | (614) | 390 | ||||||||||||||
| Unrealized gains (losses) on securities, net of tax | 1,816 | 2,307 | (1,464) | ||||||||||||||
| Unrealized losses on interest rate swaps: | |||||||||||||||||
| Unrealized losses on interest rate swaps | (12,876) | (11,121) | (1,604) | ||||||||||||||
| Income tax benefit | 3,001 | 2,335 | 337 | ||||||||||||||
| Unrealized losses on interest rate swaps, net of tax | (9,875) | (8,786) | (1,267) | ||||||||||||||
| Total other comprehensive loss, net of tax | (8,059) | (6,479) | (2,731) | ||||||||||||||
| Comprehensive (loss) income | $ | (2,155) | $ | 11,737 | $ | 14,702 | |||||||||||
See Notes to Consolidated Financial Statements
66
Bankwell Financial Group, Inc.
Consolidated Statements of Shareholders’ Equity
(In thousands, except share data)
| | | | Number of Outstanding Shares | | | Preferred Stock | | | Common Stock | | | Retained Earnings | | | Accumulated Other Comprehensive Income (Loss) | | | Total | | ||||||||||||||||||
| Balance at January 1, 2015 | | | | | 7,185,482 | | | | | $ | 10,980 | | | | | $ | 107,265 | | | | | $ | 10,434 | | | | | $ | 531 | | | | | $ | 129,210 | | |
| Net income | | | | | — | | | | | | — | | | | | | — | | | | | | 9,030 | | | | | | — | | | | | | 9,030 | | |
| Other comprehensive loss, net of tax | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | (304) | | | | | | (304) | | |
| Cash dividends declared ($0.05 per share) | | | | | — | | | | | | — | | | | | | — | | | | | | (376) | | | | | | — | | | | | | (376) | | |
| Preferred stock cash dividends | | | | | — | | | | | | — | | | | | | — | | | | | | (125) | | | | | | — | | | | | | (125) | | |
| Redemption of SBLF preferred stock | | | | | — | | | | | | (10,980) | | | | | | — | | | | | | — | | | | | | — | | | | | | (10,980) | | |
| Stock-based compensation expense | | | | | — | | | | | | — | | | | | | 1,033 | | | | | | — | | | | | | — | | | | | | 1,033 | | |
| Warrants exercised | | | | | 269,992 | | | | | | — | | | | | | 3,780 | | | | | | — | | | | | | — | | | | | | 3,780 | | |
| Issuance of restricted stock | | | | | 51,800 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | |
| Forfeitures of restricted stock | | | | | (25,573) | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | |
| Stock options exercised | | | | | 34,590 | | | | | | — | | | | | | 501 | | | | | | — | | | | | | — | | | | | | 501 | | |
| Balance at December 31, 2015 | | | | | 7,516,291 | | | | | | — | | | | | | 112,579 | | | | | | 18,963 | | | | | | 227 | | | | | | 131,769 | | |
| Net income | | | | | — | | | | | | — | | | | | | — | | | | | | 12,350 | | | | | | — | | | | | | 12,350 | | |
| Other comprehensive income, net of tax | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 663 | | | | | | 663 | | |
| Cash dividends declared ($0.22 per share) | | | | | — | | | | | | — | | | | | | — | | | | | | (1,661) | | | | | | — | | | | | | (1,661) | | |
| Stock-based compensation expense | | | | | — | | | | | | — | | | | | | 1,188 | | | | | | — | | | | | | — | | | | | | 1,188 | | |
| Warrants exercised | | | | | 11,200 | | | | | | — | | | | | | 200 | | | | | | — | | | | | | — | | | | | | 200 | | |
| Issuance of restricted stock | | | | | 29,935 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | |
| Forfeitures of restricted stock | | | | | (883) | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | |
| Stock options exercised | | | | | 64,120 | | | | | | — | | | | | | 1,106 | | | | | | — | | | | | | — | | | | | | 1,106 | | |
| Net tax benefit related to stock-based compensation | | | | | — | | | | | | — | | | | | | 280 | | | | | | — | | | | | | — | | | | | | 280 | | |
| Balance at December 31, 2016 | | | | | 7,620,663 | | | | | | — | | | | | | 115,353 | | | | | | 29,652 | | | | | | 890 | | | | | | 145,895 | | |
| Net income | | | | | — | | | | | | | | | | | | — | | | | | | 13,830 | | | | | | — | | | | | | 13,830 | | |
| Other comprehensive income, net of tax | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 503 | | | | | | 503 | | |
| Cash dividends declared ($0.28 per share) | | | | | — | | | | | | — | | | | | | — | | | | | | (2,149) | | | | | | — | | | | | | (2,149) | | |
| Stock-based compensation expense | | | | | — | | | | | | — | | | | | | 917 | | | | | | — | | | | | | — | | | | | | 917 | | |
| Warrants exercised | | | | | 35,000 | | | | | | — | | | | | | 663 | | | | | | — | | | | | | — | | | | | | 663 | | |
| Issuance of restricted stock | | | | | 40,250 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | |
| Forfeitures of restricted stock | | | | | (18,228) | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | |
| Stock options exercised | | | | | 73,738 | | | | | | — | | | | | | 1,368 | | | | | | — | | | | | | — | | | | | | 1,368 | | |
| Reclass adjustment resulting from tax law change | | | | | — | | | | | | — | | | | | | — | | | | | | (301) | | | | | | 301 | | | | | | — | | |
| Balance at December 31, 2017 | | | | | 7,751,423 | | | | | $ | — | | | | | $ | 118,301 | | | | | $ | 41,032 | | | | | $ | 1,694 | | | | | $ | 161,027 | | |
| | |||||||||||||||||||||||||||||||||||||
| Number of Outstanding Shares | Common Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||||||||||
| Balance at January 1, 2018 | 7,751,424 | $ | 118,301 | $ | 41,032 | $ | 1,694 | $ | 161,027 | ||||||||||||||||||||
| Net income | — | — | 17,433 | — | 17,433 | ||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | (2,731) | (2,731) | ||||||||||||||||||||||||
| Cash dividends declared ($0.48 per share) | — | — | (3,759) | — | (3,759) | ||||||||||||||||||||||||
| Stock-based compensation expense | — | 1,290 | — | — | 1,290 | ||||||||||||||||||||||||
| Warrants exercised | 22,400 | 400 | — | — | 400 | ||||||||||||||||||||||||
| Issuance of restricted stock | 44,300 | — | — | — | — | ||||||||||||||||||||||||
| Forfeitures of restricted stock | (3,873) | — | — | — | — | ||||||||||||||||||||||||
| Stock options exercised | 28,020 | 536 | — | — | 536 | ||||||||||||||||||||||||
| Balance at December 31, 2018 | 7,842,271 | 120,527 | 54,706 | (1,037) | 174,196 | ||||||||||||||||||||||||
| Net income | — | — | 18,216 | — | 18,216 | ||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | (6,479) | (6,479) | ||||||||||||||||||||||||
| Cash dividends declared ($0.52 per share) | — | — | (4,079) | — | (4,079) | ||||||||||||||||||||||||
| Stock-based compensation expense | — | 1,020 | — | — | 1,020 | ||||||||||||||||||||||||
| Issuance of restricted stock | 64,150 | — | — | — | — | ||||||||||||||||||||||||
| Forfeitures of restricted stock | (5,800) | — | — | — | — | ||||||||||||||||||||||||
| Stock options exercised | 2,350 | 30 | — | — | 30 | ||||||||||||||||||||||||
| Repurchase of common stock | (34,168) | (988) | — | — | (988) | ||||||||||||||||||||||||
ASU 2016-12 transition adjustment, net of tax | — | — | 481 | — | 481 | ||||||||||||||||||||||||
| Balance at December 31, 2019 | 7,868,803 | 120,589 | 69,324 | (7,516) | 182,397 | ||||||||||||||||||||||||
| Net income | — | — | 5,904 | — | 5,904 | ||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | (8,059) | (8,059) | ||||||||||||||||||||||||
| Cash dividends declared ($0.56 per share) | — | — | (4,389) | — | (4,389) | ||||||||||||||||||||||||
| Stock-based compensation expense | — | 1,770 | — | — | 1,770 | ||||||||||||||||||||||||
| Issuance of restricted stock | 109,199 | — | — | — | — | ||||||||||||||||||||||||
| Forfeitures of restricted stock | (1,725) | — | — | — | — | ||||||||||||||||||||||||
| Stock options exercised | 1,500 | 16 | — | — | 16 | ||||||||||||||||||||||||
| Repurchase of common stock | (58,499) | (1,037) | — | — | (1,037) | ||||||||||||||||||||||||
| Balance at December 31, 2020 | 7,919,278 | $ | 121,338 | $ | 70,839 | $ | (15,575) | $ | 176,602 | ||||||||||||||||||||
See Notes to Consolidated Financial Statements
67
Bankwell Financial Group, Inc. Consolidated Statements of Cash Flows (In thousands) | |||||||||||||||||
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Cash flows from operating activities | |||||||||||||||||
| Net income | $ | 5,904 | $ | 18,216 | $ | 17,433 | |||||||||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | |||||||||||||||||
| Net amortization (accretion) of premiums and discounts on investment securities | 95 | (368) | (54) | ||||||||||||||
| Provision for loan losses | 7,605 | 437 | 3,440 | ||||||||||||||
| (Credit) provision for deferred income taxes | (3,516) | 276 | 1,284 | ||||||||||||||
| Net gain on sales of available for sale securities | 0 | (76) | (222) | ||||||||||||||
| Change in fair value of marketable equity securities | (54) | (66) | 0 | ||||||||||||||
| Depreciation and amortization | 3,276 | 3,377 | 1,732 | ||||||||||||||
| Impairment of right-of-use asset | 280 | 0 | 0 | ||||||||||||||
| Amortization of debt issuance costs | 52 | 52 | 52 | ||||||||||||||
| Increase in cash surrender value of bank-owned life insurance | (967) | (1,008) | (1,057) | ||||||||||||||
| Gains and fees from sales of loans | (43) | (1,791) | (984) | ||||||||||||||
| Stock-based compensation | 1,770 | 1,020 | 1,290 | ||||||||||||||
| Net amortization of purchase accounting adjustments | 138 | 76 | 239 | ||||||||||||||
| Loss on sale of premises and equipment | 35 | 10 | 44 | ||||||||||||||
| (Gain) loss on sale and write-downs of other real estate owned, net | (19) | 102 | 0 | ||||||||||||||
| Write down of assets held for sale | 1,652 | 0 | 0 | ||||||||||||||
| Net change in: | |||||||||||||||||
| Deferred loan fees | 809 | (360) | (745) | ||||||||||||||
| Accrued interest receivable | (620) | 416 | (465) | ||||||||||||||
| Other assets | (19,582) | (12,883) | (1,008) | ||||||||||||||
| Accrued expenses and other liabilities | 1,673 | (799) | (1,002) | ||||||||||||||
| Net cash (used in) provided by operating activities | (1,512) | 6,631 | 19,977 | ||||||||||||||
| Cash flows from investing activities | |||||||||||||||||
| Proceeds from principal repayments on available for sale securities | 14,522 | 9,881 | 9,430 | ||||||||||||||
| Proceeds from principal repayments on held to maturity securities | 238 | 226 | 180 | ||||||||||||||
| Net proceeds from sales and calls of available for sale securities | 2,200 | 16,455 | 12,377 | ||||||||||||||
| Net proceeds from sales and calls of held to maturity securities | 0 | 4,900 | 0 | ||||||||||||||
| Purchases of available for sale securities | (20,636) | (12,270) | (24,379) | ||||||||||||||
| Purchases of marketable equity securities | (35) | (43) | (2,003) | ||||||||||||||
| Net increase in loans | (21,426) | (3,359) | (68,923) | ||||||||||||||
| Loan principal sold from loans not originated for sale | (2,265) | (25,510) | (8,980) | ||||||||||||||
| Proceeds from sales of loans not originated for sale | 2,307 | 27,301 | 9,964 | ||||||||||||||
| Disposals (purchases) of premises and equipment, net | 3,337 | (645) | (3,351) | ||||||||||||||
| (Purchase) reduction of Federal Home Loan Bank stock | (385) | 635 | 1,073 | ||||||||||||||
| Proceeds from sale of other real estate owned | 199 | 1,115 | 0 | ||||||||||||||
| Net cash (used in) provided by investing activities | (21,944) | 18,686 | (74,612) | ||||||||||||||
| | | | Year Ended December 31, | | |||||||||||||||
| | | | 2017 | | | 2016 | | | 2015 | | |||||||||
| Cash flows from operating activities | | | | | | | | | | | | | | | | | | | |
| Net income | | | | $ | 13,830 | | | | | $ | 12,350 | | | | | $ | 9,030 | | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | |
| Net (accretion) amortization of premiums and discounts on investment securities | | | | | (31) | | | | | | 1,737 | | | | | | 99 | | |
| Provision for loan losses | | | | | 1,341 | | | | | | 3,914 | | | | | | 3,230 | | |
| Deferred income taxes | | | | | 3,908 | | | | | | (1,104) | | | | | | (966) | | |
| Net (gain) loss on sales of available for sale securities | | | | | (165) | | | | | | 115 | | | | | | — | | |
| Depreciation and amortization | | | | | 1,513 | | | | | | 1,729 | | | | | | 1,685 | | |
| Amortization of debt issuance costs | | | | | 52 | | | | | | 51 | | | | | | — | | |
| Increase in cash surrender value of bank-owned life insurance | | | | | (1,170) | | | | | | (693) | | | | | | (727) | | |
| Loan principal sold from loans originated for sale | | | | | (3,485) | | | | | | (3,313) | | | | | | (6,929) | | |
| Proceeds from sales of loans originated for sale | | | | | 4,626 | | | | | | 3,381 | | | | | | 7,546 | | |
| Originations of loans held for sale | | | | | — | | | | | | (254) | | | | | | — | | |
| Net gain on sales of loans | | | | | (1,427) | | | | | | (466) | | | | | | (1,113) | | |
| Stock-based compensation | | | | | 917 | | | | | | 1,188 | | | | | | 1,033 | | |
| Net accretion of purchase accounting adjustments | | | | | (80) | | | | | | (136) | | | | | | (104) | | |
| Loss on sale and write-downs of foreclosed real estate | | | | | 128 | | | | | | 25 | | | | | | 184 | | |
| Net change in: | | | | | | | | | | | | | | | | | | | |
| Deferred loan fees | | | | | (829) | | | | | | 466 | | | | | | 668 | | |
| Accrued interest receivable | | | | | (952) | | | | | | (887) | | | | | | (748) | | |
| Other assets | | | | | (1,740) | | | | | | (3,006) | | | | | | (519) | | |
| Accrued expenses and other liabilities | | | | | 4,136 | | | | | | 2,275 | | | | | | 779 | | |
| Net cash provided by operating activities | | | | | 20,572 | | | | | | 17,372 | | | | | | 13,148 | | |
| Cash flows from investing activities | | | | | | | | | | | | | | | | | | | |
| Proceeds from principal repayments on available for sale securities | | | | | 5,217 | | | | | | 770 | | | | | | 1,877 | | |
| Proceeds from principal repayments on held to maturity securities | | | | | 212 | | | | | | 205 | | | | | | 220 | | |
| Net proceeds from sales and calls of available for sale securities | | | | | 54,705 | | | | | | 60,696 | | | | | | 22,030 | | |
| Net proceeds from sales and calls of held to maturity securities | | | | | 5,690 | | | | | | — | | | | | | 1,000 | | |
| Purchases of available for sale securities | | | | | (64,700) | | | | | | (110,485) | | | | | | — | | |
| Purchase of held to maturity securities | | | | | (10,609) | | | | | | (6,835) | | | | | | — | | |
| Purchase of bank-owned life insurance | | | | | (5,000) | | | | | | (9,000) | | | | | | — | | |
| Net increase in loans | | | | | (177,549) | | | | | | (218,603) | | | | | | (218,772) | | |
| Loan principal sold from loans not originated for sale | | | | | (14,264) | | | | | | (4,069) | | | | | | (23,380) | | |
| Proceeds from sales of loans not originated for sale | | | | | 14,805 | | | | | | 4,467 | | | | | | 24,462 | | |
| Purchases of premises and equipment | | | | | (1,874) | | | | | | (8,401) | | | | | | (938) | | |
| Purchase of Federal Home Loan Bank stock | | | | | (1,239) | | | | | | (1,389) | | | | | | (445) | | |
| Proceeds from sale of foreclosed real estate | | | | | 144 | | | | | | 951 | | | | | | 400 | | |
| Net cash used by investing activities | | | | | (194,462) | | | | | | (291,693) | | | | | | (193,546) | | |
| Cash flows from financing activities | | | | | | | | | | | | | | | | | | | |
| Net change in time certificates of deposit | | | | | 29,417 | | | | | | 165,224 | | | | | | 128,379 | | |
| Net change in other deposits | | | | | 79,967 | | | | | | 76,930 | | | | | | 83,257 | | |
| Net change in FHLB advances | | | | | 39,000 | | | | | | 40,000 | | | | | | (9,000) | | |
| Proceeds from exercise of warrants | | | | | 663 | | | | | | 200 | | | | | | 3,780 | | |
| Proceeds from exercise of options | | | | | 1,368 | | | | | | 1,106 | | | | | | 501 | | |
| Issuance of subordinated debt | | | | | — | | | | | | — | | | | | | 25,000 | | |
| Redemption of SBLF preferred stock | | | | | — | | | | | | — | | | | | | (10,980) | | |
| Dividends paid on common stock | | | | | (2,149) | | | | | | (1,661) | | | | | | (376) | | |
| Dividends paid on preferred stock | | | | | — | | | | | | — | | | | | | (125) | | |
| Net tax benefit related to stock-based compensation | | | | | — | | | | | | 280 | | | | | | — | | |
| Net cash provided by financing activities | | | | | 148,266 | | | | | | 282,079 | | | | | | 220,436 | | |
| Net (decrease) increase in cash and cash equivalents | | | | | (25,624) | | | | | | 7,758 | | | | | | 40,038 | | |
| Cash and cash equivalents: | | | | | | | | | | | | | | | | | | | |
| Beginning of year | | | | | 96,355 | | | | | | 88,597 | | | | | | 48,559 | | |
| End of period | | | | $ | 70,731 | | | | | $ | 96,355 | | | | | $ | 88,597 | | |
| Supplemental disclosures of cash flows information: | | | | | | | | | | | | | | | | | | | |
| Cash paid for: | | | | | | | | | | | | | | | | | | | |
| Interest | | | | $ | 16,582 | | | | | $ | 11,793 | | | | | $ | 7,544 | | |
| Income taxes | | | | | 8,020 | | | | | | 8,584 | | | | | | 6,136 | | |
| Noncash investing and financing activities | | | | | | | | | | | | | | | | | | | |
| Loans transferred to foreclosed real estate | | | | | — | | | | | | — | | | | | | 883 | | |
| Net change in unrealized gains on available-for-sale securities | | | | | (522) | | | | | | 6 | | | | | | (430) | | |
See Notes to Consolidated Financial Statements
68
Bankwell Financial Group, Inc. Consolidated Statements of Cash Flows - Continued (In thousands) | |||||||||||||||||
| Cash flows from financing activities | |||||||||||||||||
| Net change in time certificates of deposit | 89 | 12,419 | (16,541) | ||||||||||||||
| Net change in other deposits | 335,324 | (22,760) | 120,380 | ||||||||||||||
| Net change in FHLB advances | 25,000 | (10,000) | (39,000) | ||||||||||||||
| Proceeds from exercise of warrants | 0 | 0 | 400 | ||||||||||||||
| Proceeds from exercise of options | 16 | 30 | 536 | ||||||||||||||
| Dividends paid on common stock | (4,389) | (4,079) | (3,759) | ||||||||||||||
| Repurchase of common stock | (1,037) | (988) | 0 | ||||||||||||||
| Net cash provided by (used in) financing activities | 355,003 | (25,378) | 62,016 | ||||||||||||||
| Net increase (decrease) in cash and cash equivalents | 331,547 | (61) | 7,381 | ||||||||||||||
| Cash and cash equivalents: | |||||||||||||||||
| Beginning of year | 78,051 | 78,112 | 70,731 | ||||||||||||||
| End of period | $ | 409,598 | $ | 78,051 | $ | 78,112 | |||||||||||
| Supplemental disclosures of cash flows information: | |||||||||||||||||
| Cash paid for: | |||||||||||||||||
| Interest | $ | 23,044 | $ | 23,937 | $ | 18,662 | |||||||||||
| Income taxes | 4,030 | 2,893 | 3,685 | ||||||||||||||
| Noncash investing and financing activities | |||||||||||||||||
| Loans transferred to other real estate owned | 180 | 1,217 | 0 | ||||||||||||||
| Premises and equipment transferred to held for sale | 4,265 | 0 | 0 | ||||||||||||||
| Net change in unrealized losses or gains on available-for-sale securities | 2,355 | 2,921 | (1,854) | ||||||||||||||
| Net change in unrealized losses or gains on interest rate swaps | (12,876) | (11,121) | (1,604) | ||||||||||||||
| Establishment of right-of-use-asset and lease liability | 169 | 11,493 | 0 | ||||||||||||||
ASU 2016-02 transition adjustment, net of tax | 0 | 481 | 0 | ||||||||||||||
See Notes to Consolidated Financial Statements
69
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations and Summary of Significant Accounting Policies
Bankwell Financial Group, Inc. (the “Company” or “Bankwell”"Parent Corporation") is a bank holding company headquartered in New Canaan, Connecticut. The CompanyParent Corporation offers a broad range of financial services through its banking subsidiary, Bankwell Bank (the “Bank”"Bank" and, collectively with the Parent Corporation and the Parent Corporation's subsidiaries, "we", "our", "us", or the "Company"). The Bank was originally chartered as two separate banks, The Bank of New Canaan (“BNC”) and The Bank of Fairfield (“TBF”). In September 2013, BNC and TBF were merged and rebranded as “Bankwell Bank.” In November 2013, the Bank acquired The Wilton Bank (“Wilton”), which added one branch and approximately $25.1 million in loans and $64.2 million in deposits. In October 2014, the Bank acquired Quinnipiac Bank and Trust Company (“Quinnipiac”) which added two branches and approximately $97.8 million in loans and $100.6 million in deposits.Company.
The Bank is a Connecticut state chartered commercial bank, founded in 2002, whose deposits are insured under the Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation (“FDIC”). The Bank provides a full range of banking services to commercial and consumer customers, primarily concentrated in the New York metropolitan area and throughout Connecticut, with the majority of ourthe Company's loans in Fairfield and New Haven Counties, Connecticut, with branch locations in New Canaan, Stamford, Fairfield, Wilton, Westport, Darien, Norwalk, Hamden and North HavenHamden, Connecticut.
Many of the Company’s activities are with customers located in the New York Metropolitan area and throughout Fairfield and New Haven Counties and the surrounding region of Connecticut, and declines in property values in these areas could significantly impact the Company. The Company has significant concentrations in commercial real estate loans. Management does not believe they present any special risk. The Company does not have any significant concentrations in any one industry or customer.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and the Bank, including its wholly owned passive investment company subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and general practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities as of the date of the consolidated balance sheet and revenue and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near termnear-term relate to the allowance for loan losses, stock-based compensation, derivative instrument valuation, investment securities valuation, evaluation of investment securities for other than temporary impairment and deferred income taxes valuation.
Segments
The Company has one1 reportable segment. All of the Company’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, lending is dependent upon the ability of the Company to fund itself with deposits and borrowings while managing the interest rate and credit risk. Accordingly, all significant operating decisions are based upon analysis of the Company as one1 segment or unit.
Basis of consolidated financial statement presentation
The consolidated financial statements have been prepared in accordance with GAAP and general practices within the banking industry. Such policies have been followed on a consistent basis.
Cash and Cash Equivalents and Statement of Cash Flows
Cash and due from banks and federal funds sold are recognized as cash equivalents in the consolidated statements of cash flows. Federal funds sold generally mature in one day. For purposes of reporting cash flows, all highly liquid debt instruments purchased with an original maturity of three months or less are considered to be cash equivalents. Cash flows from loans and deposits are reported net. The balances of cash and due from banks and federal funds sold, at times, may exceed federally insured limits. The Company has not experienced any losses from such concentrations.
Investment Securities
Management determines the appropriate classifications of investment securities at the date individual investment securities are acquired, and the appropriateness of such classifications is reaffirmed at each balance sheet date. The Company’s investment securitiesinvestments are categorized as eithermarketable equity, available for sale or held to maturity.maturity securities. Held to maturity investments are carried at amortized cost; availablecost. Available for sale securities are carried at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss) as a separate component of capital, net of estimated income taxes. Marketable equity securities are carried at fair value, with any changes in fair value reported in earnings.
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Investment securities in the available for sale and held-to-maturity portfolios are reviewed quarterly for other-than-temporary impairment (OTTI)("OTTI"). If the fair value of a debt security is below amortized cost, other-than-temporary impairment is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the security. OTTI is required to be recognized regardless of the credit loss component if the Company intends to sell the security or if it is “more-likely-than-not” that the Company will be required to sell the security before recovery of its amortized cost basis. The credit loss component of an other-than-temporary impairment write-down is recorded in earnings, while the remaining portion of the impairment loss is recognized in other comprehensive income (loss), provided the Company does not intend to sell the underlying debt security and it is more-likely-than-not that the Company will not be required to sell the debt security prior to recovery.
In determining whether a credit loss exists and the period over which the fair value of the debt security is expected to recover, management considers the following factors: the length of time and extent that fair value has been less than cost, the financial condition and near term prospects of the issuer, any external credit ratings, the level of excess cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities and the level of credit enhancement provided by the structure.
The sale of a held to maturity security within three months of its maturity date or after collection of at least 85% of the principal outstanding at the time the security was acquired is considered a maturity for purposes of classification and disclosure.
Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains or losses on the sales of securities are recognized at trade date utilizing the specific identification method.
Transfers of debt securities into the held to maturity classification from the available for sale classification are made at fair value on the date of transfer. The unrealized holding gain or loss on the date of transfer is retained in accumulated other comprehensive income and in the carrying value of the held to maturity securities. Such amounts are amortized over the remaining contractual lives of the securities. When transfers of debt securities into the available for sale classification from the held to maturity classification occur, any unrealized holding gains or losses on the transfer date are recognized in other comprehensive incomeincome.
Bank Owned Life Insurance
The investment in bank owned life insurance (“BOLI”) represents the cash surrender value of life insurance policies on the lives of certain Bank employees who have provided positive consent allowing the Bank to be the beneficiary of such policies. Increases in the cash value of the policies, as well as insurance
proceeds received, are recorded in noninterest income, and are not subject to income taxes. The financial strength of the insurance carrier is reviewed prior to the purchase of BOLI and annually thereafter.
Federal Home Loan Bank Stock
Federal Home Loan Bank of Boston (“FHLB”) stock is a non-marketable equity security that is carried at cost. There are no quoted market prices for this security and the security is not liquid. The Company can sell these securities back to the FHLB at par.
Loans Held For Sale
Loans held for sale are those loans which management has the intent to sell in the foreseeable future, and are carried at the lower of aggregate cost or market value. Net unrealized losses, if any, are recognized by a valuation allowance through a charge to noninterest income. Realized gains and losses on the sale of loans are recognized on the trade date and are determined by the difference between the sale proceeds and the carrying value of the loans.
Loans may be sold with servicing rights released or retained. At the time of the sale, management records a servicing asset for the value of any retained servicing rights, which represents the present value of the differential between the contractual servicing fee and adequate compensation, defined as the fee a sub-servicer would require to assume the role of servicer, after considering the estimated effects of prepayments.
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, — put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the transferor does not maintain effective control over the transferred assets through either (a) an agreement that both entitles and obligates the transferor to repurchase or redeem the assets before maturity or (b) the ability to unilaterally cause the holder to return specific assets, other than through a cleanup call.
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Loans Receivable
Loans receivable that management has the ability and intent to hold for the foreseeable future or until maturity or payoff are stated at their current unpaid principal balances, net of the allowance for loan losses, charge-offs, recoveries, net deferred loan origination fees and unamortized loan premiums.
Past due or delinquency status for all loans is based on the number of days past due in accordance with its contractual payment terms.
A loan is considered impaired when it is probable that all contractual principal or interest payments due will not be collected in accordance with the terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral, if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are recorded as adjustments to the allowance for loan losses.
Impaired loans also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.
Loans greater than 90 days past due are put on nonaccrual status (excluding certain acquired credit impaired loans). Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued, but uncollected, is reversed against current period income. Subsequent payments are recognized on a cash basis or principal recapture basis depending on a number of factors including probability of collection and if impairment is identified. A nonaccrual loan is restored to accrual status when it is no longer delinquent and collectability of interest and principal is no longer in doubt.
Management reviews all nonaccrual loans, other loans past due 90 days or more, and restructured loans for impairment. In most cases, loan payments that are past due less than 90 days are considered minor collection delays and the related loans aremay not considered to be impaired. Consumer installment loans are considered to be pools of small balance homogeneous loans, which are collectively evaluated for impairment.
Modifications to a loan are considered to be a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulties and 2) the modification constitutes a concession.concession that is not in line with market rates and/or terms. Modified terms are dependent upon the financial position and needs of the individual borrower. Debt may be bifurcated with separate terms for each tranche of the restructured debt. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit the Company by increasing the ultimate probability of collection.
Section 4013 of the CARES Act permits a financial institution to elect to suspend troubled debt restructuring accounting, in certain circumstances, beginning March 1, 2020 and ending on the earlier of January 1, 2022, or sixty days after the national emergency concerning COVID-19 terminates. All short term loan modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any request for relief are not considered TDRs.
If a performing loan is restructured into a TDR it remains in performing status. If a nonperforming loan is restructured into a TDR, it continues to be carried in nonaccrual status. Nonaccrual classification may be removed if the borrower demonstrates compliance with the modified terms for a minimum of six months. TDR’s are reported as such for at least one year from the date of restructuring. In years after the restructuring, troubled debt restructured loans aremay be removed from this classification if the restructuring agreement specifies a market rate of interest equal to that which would be provided to a borrower with similar credit at the time of restructuring and the loan is not deemed to be impaired based on the modified terms.
Acquired Loans
Loans that the Company acquires in acquisitions are initially recorded at fair value with no carryover of the related allowance for credit losses. Determining the fair value of acquired loans involves estimating the amount and timing of principal and interest cash flows initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of interest.
For loans which meet the criteria stipulated in Accounting Standards Codification (“ASC”) 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality”, the Company recognizes an accretable yield, which is defined as the excess of all cash flows expected at acquisition over the initial fair value of the loan, as interest income on a level-yield basis over the expected remaining life of the loan. The excess of the loan’s contractually required payments over the cash flows expected to be collected is the nonaccretable difference. The nonaccretable difference is not recognized as an adjustment of yield, a loss accrual, or a valuation allowance. After the initial acquisition, the Company continues to evaluate whether the timing and the amount of cash to be collected are reasonably estimated. Subsequent significant increases in cash flows the Company expects to collect will first reduce previously recognized valuation allowance and then be reflected prospectively as an increase to the level yield. Subsequent decreases in expected cash flows may result in the loan being considered impaired.
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Interest income is not recognized to the extent that the net investment in the loan would increase to an amount greater than the estimated payoff amount.
For ASC 310-30 loans, the expected cash flows reflect anticipated prepayments, determined on a loan by loan basis, according to the anticipated collection plan of these loans. Prepayments result in the recognition of the nonaccretable balance as current period yield. Changes in prepayment assumptions may change the amount of interest income and principal expected to be collected. The expected prepayments used to determine the accretable yield are consistent between the cash flows expected to be collected and projections of contractual cash flows so as to not affect the nonaccretable difference.
For loans that do not meet the ASC 310-30 criteria, the Company records interest income on a level yield basis using the contractually required cash flows. The Company subjects loans that do not meet the ASC 310-30 criteria to ASC Topic 450, “Contingencies”, by collectively evaluating these loans for an allowance for loan loss, using the same methodology as loans originated by the Company.
Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition are considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if the Company can reasonably estimate the timing and amount of the expected cash flows on such loans and if the Company expects to fully collect the new carrying value of the loans. As such, the Company may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans,
including the impact of any accretable yield. The Company has determined that it can reasonably estimate future cash flows on the Company’s current portfolio of acquired loans that are past due 90 days or more, and on which the Company is accruing interest and the Company expects to fully collect the carrying value of the loans.
Allowance For Loan Losses (ALLL)
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance for loan losses when management believes the non-collectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance for loan losses consists of specific and general components. The specific component relates to impaired loans that are classified as doubtful, substandard"doubtful", "substandard" or special mention."special mention". For these loans, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non classified loans and is based on historical loss experience, including appropriate peer data, adjusted for qualitative factors. Management considers several qualitative factors, both internal and external to the Company, including valuation of underlying collateral; macro and local economic factors; nature and volume of loan portfolio; concentration of credit risk; net charge-off trends and non-accrual trends, and past due and classified loan trends when determining the general reserve.
Management believes the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies have the authority to require additions to the allowance or charge-offs based on the agencies’ judgments about information available to them at the time of their examination.
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 includes factors that are consistent with the ALLL methodology for our loan portfolio as well as a draw down factor applied to the various commitments. The reserve for unfunded credit commitments is included within other liabilities in the accompanying Consolidated Balance Sheets, and changes in the reserve are reported as a component of other expense in the accompanying Consolidated Statements of Income. See Note 12: Commitments and Contingencies for further information.
Interest and Fees on Loans
Interest on loans is accrued and included in income based on contractual rates applied to principal amounts outstanding. Accrual of interest is discontinued when loan payments are 90 days or more past due, based on contractual terms, or when, in the judgment of management, collectability of the loan or loan interest becomes uncertain. When interest accrual is discontinued, all unpaid accrued interest is reversed against interest income. Subsequent recognition of income occurs only to the extent payment is received subject to management’s assessment of the collectability of the remaining interest and principal.
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A nonaccrual loan is restored to accrual status when it is no longer delinquent and collectability of interest and principal is no longer in doubt.
Loan origination fees, net of direct loan origination costs, are deferred and amortized as an adjustment to the loan’s yield generally over the contractual life of the loan, utilizing the interest method.
Goodwill and Intangibles
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination. Intangible assets are assets acquired in a business combination that lack physical substance but can be distinguished from goodwill because the intangible asset is capable of being sold or exchanged on its own or in combination with related contracts, assets or liabilities. Intangible assets are amortized on a straight-line or accelerated basis over estimated lives. Goodwill is not amortized. Goodwill and identifiable intangible assets are evaluated for impairment annually or whenever events or changes in circumstances indicate the carrying value of these assets may not be recoverable. When these assets are evaluated for impairment, if the carrying amount exceeds fair value, an impairment charge is recorded to income. The fair value is based on observable market prices, when practicable. Other valuation techniques may be used when market prices are unavailable, including estimated discounted cash flows. This type of analysis contains uncertainties because it requires management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies. In the event of future changes in fair value, the Company may be exposed to an impairment charge that could be material.
Assets acquired through deed in lieu or loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.
Premises and Equipment
Premises and equipment are stated at cost, net of accumulated depreciation and amortization. Leasehold improvements are capitalized and amortized over the shorter of the terms of the related leases or the estimated economic lives of the improvements. Depreciation and amortization is charged to operations using the straight-line method over the estimated useful lives of the related assets which range from three to thirty ninethirty-nine years. Gains and losses on dispositions are recognized upon realization. Maintenance and repairs are expensed as incurred and improvements are capitalized.
Assets Held for Sale
Assets held for sale (excluding loans) consist of real estate properties that are expected to sell within a year. The assets are reported at the lower of the carrying amount or fair value less costs to sell. Depreciation is not recognized on any assets that are classified as held for sale.
Leases
The Company recognizes and measures it leases in accordance with ASC 842, "Leases". The Company leases real estate for its branch offices under various operating lease agreements. In addition, the Company's headquarter building is on land leased from the local municipality. The Company determines if an arrangement is a lease, or contains a lease, at inception of a contract and when the terms of an existing contract are changed. The Company recognizes a lease liability and right-of-use-asset (ROUA) at the commencement date of the lease. The lease liability is initially and subsequently recognized based on the present value of its future lease payments. The discount rate is the implicit rate if it's readily determinable or otherwise the Company uses its incremental borrowing rate. The implicit rates of our leases are not readily determinable and accordingly, we use our incremental borrowing rate based on the information available at the commencement date for all leases. The ROUA is subsequently measured throughout the lease term at the amount of the remeasured lease liability (i.e., present value of the remaining lease payments), plus any unamortized initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of any lease incentives received, and any impairment recognized. Lease cost for lease payments is recognized on a straight-line basis over the lease term. The ROUA is included in premises and equipment, net and the lease liability is included in accrued expenses and other liabilities on the consolidated balance sheets.
Impairment of Long-Lived Assets
Long-lived assets, including premises and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment is indicated by that review, the asset is written down to its estimated fair value through a charge to noninterest expense.
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Servicing Rights
When loans are sold on a servicing retained basis, servicing rights are initially recorded at fair value with the income statement effect recorded in service charges and feesnoninterest income. All classes of servicing assets are subsequently measured using the amortization method, which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the life of the underlying loans.
Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. Any impairment is reported as a valuation allowance, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists, a reduction of the allowance may be recorded as an increase to income. Changes in the valuation allowance are reported with service charges and fees income on the consolidated statements of income. The fair values of servicing rights are subject to fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.
Loans serviced for others are not included in the accompanying consolidated balance sheets.
Servicing fee income, which is included in service charges and fees on the income statement, is recorded for fees earned for servicing loans. Fees earned for servicing loans are based on a contractual percentage of the outstanding principal amount of the loan and are recorded as income when earned. The amortization of servicing rights is netted against income from service charges and fees.recorded in noninterest income.
Income Taxes
The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that all or some portion of the deferred tax assets will not be realized.
In the ordinary course of business there is inherent uncertainty in quantifying the Company’s income tax positions. Income tax positions and recorded tax benefits assessed for all years are subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, we have determined the amount of the tax benefit to be recognized by estimating the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company has $393$394 thousand and $95$269 thousand of liabilities for uncertain tax positions at December 31, 20172020 and 2016.2019, respectively. Where applicable, associated interest and penalties have also been recognized. We recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense.
Advertising costs
Advertising costs are expensed as incurred.
Stock Compensation
The Company measures and recognizes compensation cost relating to share-based payment transactions based on the grant-date fair value of the equity instruments issued. The fair value of time-based restricted stock is recorded based on the grant date fair value of the Company’s common stock. TheFor performance based grants, the Company records an expense over the vesting period based on (a) the probability that the performance metric will be met and (b) the fair market value of market-based restrictedthe Company’s stock is based on values derived using a Monte Carlo based pricing model.at the date of the grant. The fair value of stock options is determined using the Black-Scholes Option Pricing model. Stock-based compensation costs are recognized over the requisite service period for the awards. Compensation expense reflects the number of awards expected to vest and is adjusted based on awards that ultimately vest. The Company recognizes forfeitures as they occur.
Earnings Per Share
Unvested restricted stock awards that contain non-forfeitable rights to dividends, are participating securities, and are included in the computation of EPS pursuant to the two-class method. The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. The Company’s unvested restricted stock awards qualify as participating securities.
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Net income is allocated between the common stock and participating securities pursuant to the two-class method. Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period, excluding participating unvested restricted stock awards.
Diluted EPS is computed in a similar manner, except that the denominator includes the number of additional common shares that would have been outstanding if potentially dilutive common shares were issued using the treasury stock method.
Comprehensive Income
Comprehensive income represents the sum of net income and items of other comprehensive income or loss, including net unrealized gains or losses on securities available for sale and net unrealized gains or losses on derivatives accounted for as cash flow hedges. The Company’s total comprehensive income or loss for the years ended December 31, 2017, 20162020, 2019 and 20152018 is reported in the Consolidated Statements of Comprehensive Income.
Fair Values of Financial Instruments
The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in certain instances, there are no quoted market prices for certain assets or liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the asset or liability.
Fair value measurements focus on exit prices in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment.
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at either December 31, 20172020 or December 31, 2016.2019. The estimated fair value amounts have been measured as of the respective period-ends, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end.
Derivative Instruments
The effective portion of unrealized changes in the fair value of derivatives accounted for as cash flow hedges is reported in other comprehensive income and subsequently reclassified to earnings in the same period or periods during which the hedged forecasted transaction affects earnings. The Bank assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction. The ineffective portion of changes in the fair value of the derivatives is recognized directly in earnings. The interest rate swap assets are presented in other assets and the interest rate swap liabilities are presented in accrued expenses and other liabilities in the consolidated balance sheets.
The Bank’s cash flow hedge positions are all forward starting interest rate swap transactions.
The Company also has derivatives not designated as hedges. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain loan customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.
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Related Party Transactions
Directors and officers of the Company and their affiliates have been customers of and have had transactions with the Company, and it is expected that such persons will continue to have such transactions in the future. Management believes that all deposit accounts, loans, services and commitments comprising such transactions were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers who are not directors or officers. In the opinion of management, the transactions with related parties did not involve more than normal risks of collectability, nor favored treatment or terms, nor present other unfavorable features. Note 22 contains details regarding related party transactions.
Common Share Repurchases
The Company is incorporated in the state of Connecticut. Connecticut law does not provide for treasury shares, rather shares repurchased by the Company constitute authorized, but unissued shares. GAAP states that accounting for treasury stock shall conform to state law. Therefore, the cost of shares repurchased by the Company has been allocated to common stock balances.
Reclassification
Certain prior period amounts have been reclassified to conform to the 20172020 financial statement presentation. These reclassifications only changed the reporting categories and did not affect the results of operations or consolidated financial position.
Recent accounting pronouncements
The following section includes changes in accounting principles and potential effects of new accounting guidance and pronouncements.
ASU No. 2016-13, Financial Instruments — Instruments—Credit Losses (Topic 326): Measurement“Measurement of Credit Losses on Financial Instruments. The” This ASU changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and can result in the earlier recognition of credit losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. On July 17, 2019, the FASB proposed deferring the effective date of ASC 326 for smaller reporting companies as defined by the SEC. The amendments in this update will beFASB proposed a three-year deferral for smaller reporting companies, with an effective for the Company ondate of January 1, 2020, including interim periods within that fiscal year. Early2023. On October 16, 2019, the FASB voted in favor of finalizing its proposal to defer the effective date of this standard. The FASB issued ASU No. 2019-10, which officially delayed the adoption is permitted as of thethis standard for smaller reporting companies until fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.2022. The Company does qualify to defer the adoption of this standard and has not yet adopted this standard. Management is currently evaluatingcontinues to evaluate the impact of its pendingfuture adoption of this guidance on the Company’s financial statements.
ASU No. 2017-04, Intangibles —– Goodwill and Other (Topic 350): Simplifying“Simplifying the Test for Goodwill Impairment:Impairment.” This ASU simplifies the test for goodwill impairment by eliminating stepStep 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity was required to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update,update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, this ASU also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. On October 16, 2019, the FASB voted in favor of a proposal to defer the effective date of this standard in the same manner it is deferring the effective date of ASC 326. The amendments will be effectiveFASB issued ASU No. 2019-10, which officially delayed the adoption of this standard for the Company for its annual or any interim goodwill impairment tests insmaller reporting companies until fiscal years beginning after December 15, 2019. Early2022. The Company does qualify to defer the adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.of this standard and has not yet adopted this standard. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements.
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Recently adopted accounting pronouncements
ASU No. 2017-08, Receivables — Nonrefundable Fees and Other Costs (subtopic 310-20)2018-13, Fair Value Measurement (Topic 820): Premium Amortization on Purchased Callable Debt Securities:“Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments in this Update shortenupdate modify the amortizationdisclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The following disclosure requirements were removed from topic 820 for public entities: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation processes for Level 3 fair value measurements. This update also modified and added disclosure requirements to Topic 820, including adding (1) the changes in unrealized gains and losses for the period included in other comprehensive income for certain callable debt securitiesrecurring Level 3 fair value measurements held at the end of the reporting period; and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a premium. Specifically,more reasonable and rational method to reflect the amendments require the premiumdistribution of unobservable inputs used to be amortized to the earliest call date.develop Level 3 fair value measurements. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments will beguidance was effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.on January 1, 2020. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements.
ASU No. 2017-12, Derivatives2020-04, Reference Rate Reform (Topic 848): "Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This ASU provides optional expedients and Hedging: Targeted Improvementsexceptions for applying GAAP to Accounting for Hedging Activities (Topic 815):contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The purposeamendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 isupdate are effective for public businessall entities as of March 12, 2020 through December 31, 2022. Optional expedients include that modifications of contracts should be accounted for fiscal years beginning after December 15, 2018,by prospectively adjusting the effective interest rate and modifications of leases should be accounted for as a continuation of the existing contract with early adoption, including adoption inno reassessments of lease classification and discount rate or remeasurements of lease payments. This ASU also provides many practical expedients for derivative accounting. In addition, an interim period, permitted. ASU 2017-12 requiresentity may elect to sell and/or transfer held to maturity securities that reference a modified retrospective transition method in whichrate affected by the reference rate reform classified as held to maturity prior to January 1, 2020. In particular, the Company will recognizemade the cumulative effectfollowing elections as it relates to hedging relationships; (1) Option to not reassess a previous accounting determination (paragraph 848-20-35-2); (2) Option to not dedesignate a hedging relationship due to a change in critical term (paragraph 848-20-35-3); (3) Option to change the contractual terms of a hedging instrument, hedged item, or forecasted transaction and to not dedesignate a hedging relationship (paragraph 848-30-25-5); (4) Adopt expedient ASC 848-50-25-2 to assert probability of the changehedged interest regardless of any expected modification in terms related to reference rate reform; and (5) To continue the method of assessing effectiveness as documented in the original hedge documentation and apply the expedient in ASC 848-50-35-17 so that the reference rate on the opening balance of each affected component of equityhypothetical derivative matches the reference rate on the hedging instrument. For new hedging relationships designated subsequent to December 31, 2020, the Company elects to apply the expedient in ASC 848-50-25-11 to assume that the statement of financial position asreference rate will not be replaced for the remainder of the date of adoption.hedging relationship. The Company does not expect the application of this guidance todid not have a material impact on the Company’sCompany's financial statements.
2. Shareholders’ Equity
The Company has 10,000,000 shares authorized and 7,919,278 shares issued and outstanding at December 31, 2020 and 10,000,000 shares authorized and 7,868,803 shares issued and outstanding at December 31, 2019. The Company's stock is traded on the NASDAQ stock market under the ticker symbol BWFG.
Warrants
In connection with a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate tax rate. The amount of the reclassification would be the difference between the historical 35% corporate income tax rate2014 acquisition and the newly enacted 21% corporate tax rate. The amendments would be effective for all entities for fiscal years beginning after December 15, 2018associated merger agreement, the Company had issued warrants convertible to shares of common stock at a pre-determined price and interim periods within those fiscal years. Early adoption of the amendments would be permitted including adoption in any interim period, for public business entities for reporting periods for which financial statements have not yet been issued and all other entities for reporting periods for which financial statements have not yet been made available for issuance. An entity would apply the amendments in the update retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 is recognized.exchange ratio. The Company elected to adopt this update and recorded a $301 thousand reduction to retained earnings and increase to accumulated other comprehensive incomedoes not have any warrants outstanding as of December 31, 2017.
Dividends
The Company’s shareholders are entitled to dividends when and if declared by the boardBoard of directors,Directors, out of funds legally available. The ability of the Company to pay dividends depends, in part, on the ability of the Bank to pay dividends to the Company. In accordance with Connecticut statutes, regulatory approval is required to pay dividends in excess of the Bank’s profits retained in the current year plus retained profits from the previous two years. The Bank is also prohibited from paying dividends that would reduce its capital ratios below minimum regulatory requirements.
Issuer Purchases of Equity Securities
On December 19, 2018, the Company's Board of Directors authorized a share repurchase program of up to 400,000 shares of the Company's Common Stock. The Company didintends to accomplish the share repurchases through open market
78
transactions, though the Company could accomplish repurchases through other means, such as privately negotiated transactions. The timing, price and volume of repurchases will be based on market conditions, relevant securities laws and other factors. The share repurchase plan does not repurchaseobligate the Company to acquire any particular amount of Common Stock, and it may be modified or suspended at any time at the Company's discretion. During the year ended December 31, 2020, the Company purchased 58,499 shares of its common stock during 2017 or 2016.
3. Goodwill and other intangible assets
Information on goodwill for the yearyears ended December 31, 20172020, 2019 and 20162018 is as follows:
| | | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | |||||||||||||||||||||||||
| | | (In thousands) | | |||||||||||||||||||||||||||
| Year Ended December 31, 2020 | Year Ended December 31, 2019 | Year Ended December 31, 2018 | ||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||
| Balance, beginning of the period | | | $ | 2,589 | | | | $ | 2,589 | | | Balance, beginning of the period | $ | 2,589 | $ | 2,589 | $ | 2,589 | ||||||||||||
| Impairment | | | | — | | | | | — | | | Impairment | 0 | 0 | 0 | |||||||||||||||
| Balance, end of the period | | | $ | 2,589 | | | | $ | 2,589 | | | Balance, end of the period | $ | 2,589 | $ | 2,589 | $ | 2,589 | ||||||||||||
| | ||||||||||||||||||||||||||||||
The Company tests for goodwill impairment annually as of June 30th. NoNaN impairment was required to be recorded on goodwill for 2017in 2020, 2019 or 2016.2018.
The table below provides information regarding the carrying amounts and accumulated amortization of amortized intangible assets as of the dates set forth below. The remaining net intangible asset as of December 31, 20172020 will be amortized over a period of approximately 52 years.
| | | | Gross Intangible Asset | | | Accumulated Amortization | | | Net Intangible Asset | | |||||||||
| | | | (In thousands) | | |||||||||||||||
| December 31, 2017 | | | | | | | | | | | | | | | | | | | |
| Core deposit intangible | | | | $ | 1,029 | | | | | $ | 647 | | | | | $ | 382 | | |
| December 31, 2016 | | | | | | | | | | | | | | | | | | | |
| Core deposit intangible | | | | $ | 1,029 | | | | | $ | 528 | | | | | $ | 501 | | |
| | |||||||||||||||||||
| Gross Intangible Asset | Accumulated Amortization | Net Intangible Asset | |||||||||||||||
| (In thousands) | |||||||||||||||||
| December 31, 2020 | |||||||||||||||||
| Core deposit intangible | $ | 1,029 | $ | 953 | $ | 76 | |||||||||||
| December 31, 2019 | |||||||||||||||||
| Core deposit intangible | $ | 1,029 | $ | 815 | $ | 214 | |||||||||||
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4. Investment Securities
The amortized cost, gross unrealized gains and losses and fair values of available for sale and held to maturity securities segregated by contractual maturity at December 31, 20172020 were as follows:
| | | December 31, 2017 | | |||||||||||||||||||||||||||||||||||||||||||||
| | | | Amortized Cost | | | Gross Unrealized | | | Fair Value | | ||||||||||||||||||||||||||||||||||||||
| | | Gains | | Losses | | |||||||||||||||||||||||||||||||||||||||||||
| | | (In thousands) | | |||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Amortized Cost | Gross Unrealized | Fair Value | ||||||||||||||||||||||||||||||||||||||||||||||
| Gains | Losses | |||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Available for sale securities: | | | | | | | | | | | | | | | | | | | | | | Available for sale securities: | ||||||||||||||||||||||||||
| U.S. Government and agency obligations | | | | | | | | | | | | | | | | | | | | | | U.S. Government and agency obligations | ||||||||||||||||||||||||||
| Less than one year | Less than one year | $ | 9,976 | $ | 172 | $ | 0 | $ | 10,148 | |||||||||||||||||||||||||||||||||||||||
| Due from five through ten years | Due from five through ten years | 8,038 | 848 | 0 | 8,886 | |||||||||||||||||||||||||||||||||||||||||||
| Due after ten years | Due after ten years | 55,560 | 2,284 | 0 | 57,844 | |||||||||||||||||||||||||||||||||||||||||||
| Total U.S. Government and agency obligations | Total U.S. Government and agency obligations | 73,574 | 3,304 | 0 | 76,878 | |||||||||||||||||||||||||||||||||||||||||||
| Corporate bonds | Corporate bonds | |||||||||||||||||||||||||||||||||||||||||||||||
| Due from one through five years | | | $ | 13,000 | | | | $ | — | | | | $ | (82) | | | | $ | 12,918 | | | Due from one through five years | 4,000 | 57 | 0 | 4,057 | ||||||||||||||||||||||
| Due from five through ten years | | | | 100 | | | | | — | | | | | (4) | | | | | 96 | | | Due from five through ten years | 6,000 | 163 | 0 | 6,163 | ||||||||||||||||||||||
| Due after ten years | | | | 59,924 | | | | | 10 | | | | | (174) | | | | | 59,760 | | | Due after ten years | 1,500 | 7 | 0 | 1,507 | ||||||||||||||||||||||
| | | | | 73,024 | | | | | 10 | | | | | (260) | | | | | 72,774 | | | |||||||||||||||||||||||||||
| State agency and municipal obligations | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||
| Due from one through five years | | | | 2,873 | | | | | 84 | | | | | — | | | | | 2,957 | | | |||||||||||||||||||||||||||
| Due from five through ten years | | | | 7,386 | | | | | 228 | | | | | — | | | | | 7,614 | | | |||||||||||||||||||||||||||
| Due after ten years | | | | 1,700 | | | | | 33 | | | | | (27) | | | | | 1,706 | | | |||||||||||||||||||||||||||
| | | | | 11,959 | | | | | 345 | | | | | (27) | | | | | 12,277 | | | |||||||||||||||||||||||||||
| Corporate bonds | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||
| Due from one through five years | | | | 7,096 | | | | | 41 | | | | | — | | | | | 7,137 | | | |||||||||||||||||||||||||||
| | | | | 7,096 | | | | | 41 | | | | | — | | | | | 7,137 | | | |||||||||||||||||||||||||||
| Total Corporate bonds | Total Corporate bonds | 11,500 | 227 | 0 | 11,727 | |||||||||||||||||||||||||||||||||||||||||||
| Total available for sale securities | | | $ | 92,079 | | | | $ | 396 | | | | $ | (287) | | | | $ | 92,188 | | | Total available for sale securities | $ | 85,074 | $ | 3,531 | $ | 0 | $ | 88,605 | ||||||||||||||||||
| Held to maturity securities: | | | | | | | | | | | | | | | | | | | | | | Held to maturity securities: | ||||||||||||||||||||||||||
| State agency and municipal obligations | | | | | | | | | | | | | | | | | | | | | | State agency and municipal obligations | ||||||||||||||||||||||||||
| Less Than 1 Year | | | $ | 198 | | | | | 5 | | | | | — | | | | $ | 203 | | | |||||||||||||||||||||||||||
| Due from one through five years | | | | 3,880 | | | | | 20 | | | | | — | | | | | 3,900 | | | |||||||||||||||||||||||||||
| Due after ten years | | | | 16,387 | | | | | 1,227 | | | | | — | | | | | 17,614 | | | Due after ten years | $ | 16,018 | $ | 3,944 | $ | 0 | $ | 19,962 | ||||||||||||||||||
| | | | | 20,465 | | | | | 1,252 | | | | | — | | | | | 21,717 | | | |||||||||||||||||||||||||||
| Corporate bonds | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||
| Due from one through five years | | | | 1,000 | | | | | — | | | | | (5) | | | | | 995 | | | |||||||||||||||||||||||||||
| Government-sponsored mortgage backed securities | | | | | | | | | | | | | | | | | | | | | | Government-sponsored mortgage backed securities | ||||||||||||||||||||||||||
| No contractual maturity | | | | 114 | | | | | 10 | | | | | — | | | | | 124 | | | No contractual maturity | 60 | 10 | 0 | 70 | ||||||||||||||||||||||
| Total held to maturity securities | | | $ | 21,579 | | | | $ | 1,262 | | | | $ | (5) | | | | $ | 22,836 | | | Total held to maturity securities | $ | 16,078 | $ | 3,954 | $ | 0 | $ | 20,032 | ||||||||||||||||||
| | ||||||||||||||||||||||||||||||||||||||||||||||||
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The amortized cost, gross unrealized gains and losses and fair values of available for sale and held to maturity securities segregated by contractual maturity at December 31, 20162019 were as follows:
| | | December 31, 2016 | | |||||||||||||||||||||||||||||||||||||||||||||
| | | | Amortized Cost | | | Gross Unrealized | | | Fair Value | | ||||||||||||||||||||||||||||||||||||||
| | | Gains | | Losses | | |||||||||||||||||||||||||||||||||||||||||||
| | | (In thousands) | | |||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Amortized Cost | Gross Unrealized | Fair Value | ||||||||||||||||||||||||||||||||||||||||||||||
| Gains | Losses | |||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Available for sale securities: | | | | | | | | | | | | | | | | | | | | | | Available for sale securities: | ||||||||||||||||||||||||||
| U.S. Government and agency obligations | | | | | | | | | | | | | | | | | | | | | | U.S. Government and agency obligations | ||||||||||||||||||||||||||
| Due from one through five years | | | $ | 62,357 | | | | $ | 295 | | | | $ | (49) | | | | $ | 62,603 | | | |||||||||||||||||||||||||||
| Due after ten years | | | | 100 | | | | | — | | | | | (5) | | | | | 95 | | | |||||||||||||||||||||||||||
| | | | | 62,457 | | | | | 295 | | | | | (54) | | | | | 62,698 | | | |||||||||||||||||||||||||||
| State agency and municipal obligations | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||
| Less than one year | Less than one year | $ | 2,100 | $ | 0 | $ | (1) | $ | 2,099 | |||||||||||||||||||||||||||||||||||||||
| Due from one through five years | | | | 827 | | | | | 24 | | | | | (3) | | | | | 848 | | | Due from one through five years | 9,950 | 81 | 0 | 10,031 | ||||||||||||||||||||||
| Due from five through ten years | | | | 8,045 | | | | | 189 | | | | | (1) | | | | | 8,233 | | | Due from five through ten years | 8,311 | 218 | (1) | 8,528 | ||||||||||||||||||||||
| Due after ten years | | | | 5,623 | | | | | 178 | | | | | (119) | | | | | 5,682 | | | Due after ten years | 60,902 | 879 | 0 | 61,781 | ||||||||||||||||||||||
| | | | | 14,495 | | | | | 391 | | | | | (123) | | | | | 14,763 | | | |||||||||||||||||||||||||||
| Corporate bonds | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||
| Due in less than one year | | | | 2,022 | | | | | 56 | | | | | — | | | | | 2,078 | | | |||||||||||||||||||||||||||
| Due from one through five years | | | | 8,145 | | | | | 67 | | | | | — | | | | | 8,212 | | | |||||||||||||||||||||||||||
| | | | | 10,167 | | | | | 123 | | | | | ��� | | | | | 10,290 | | | |||||||||||||||||||||||||||
| Total available for sale securities | | | $ | 87,119 | | | | $ | 809 | | | | $ | (177) | | | | $ | 87,751 | | | Total available for sale securities | $ | 81,263 | $ | 1,178 | $ | (2) | $ | 82,439 | ||||||||||||||||||
| Held to maturity securities: | | | | | | | | | | | | | | | | | | | | | | Held to maturity securities: | ||||||||||||||||||||||||||
| State agency and municipal obligations | | | | | | | | | | | | | | | | | | | | | | State agency and municipal obligations | ||||||||||||||||||||||||||
| Due from one through five years | | | $ | 2,135 | | | | $ | — | | | | $ | — | | | | $ | 2,135 | | | |||||||||||||||||||||||||||
| Due after ten years | | | | 13,575 | | | | | — | | | | | — | | | | | 13,575 | | | Due after ten years | $ | 16,231 | $ | 1,991 | $ | 0 | $ | 18,222 | ||||||||||||||||||
| | | | | 15,710 | | | | | — | | | | | — | | | | | 15,710 | | | |||||||||||||||||||||||||||
| Corporate bonds | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||
| Due from one through five years | | | | 1,000 | | | | | — | | | | | (23) | | | | | 977 | | | |||||||||||||||||||||||||||
| Government-sponsored mortgage backed securities | | | | | | | | | | | | | | | | | | | | | | Government-sponsored mortgage backed securities | ||||||||||||||||||||||||||
| No contractual maturity | | | | 149 | | | | | 15 | | | | | — | | | | | 164 | | | No contractual maturity | 77 | 8 | 0 | 85 | ||||||||||||||||||||||
| Total held to maturity securities | | | $ | 16,859 | | | | $ | 15 | | | | $ | (23) | | | | $ | 16,851 | | | Total held to maturity securities | $ | 16,308 | $ | 1,999 | $ | 0 | $ | 18,307 | ||||||||||||||||||
| | ||||||||||||||||||||||||||||||||||||||||||||||||
There were 0 sales of investment securities during the year ended December 31, 2020. The gross realized gains on the salesales of investment securities totaled $165$0.1 million for the year ended December 31, 2019. The gross realized losses on the sales of investment securities totaled $17.0 thousand for the year ended December 31, 2017. Total sales proceeds were $49.2 million for the year ended December 31, 2017. There were no gross realized losses on the sale of investment securities for the year ended December 31, 2017. The gross realized gains on the sale of investment securities totaled $129.4 thousand for the year ended December 31, 2016. The gross realized losses on the sale of investment securities totaled $244.6 thousand for the year ended December 31, 2016. Total sales proceeds were $54.7 million for the year ended December 31, 2016.2019.
At December 31, 2017 there were no securities pledged as collateral with the FHLB. At2020 and December 31, 2016,2019, none of the Company's securities with approximate fair values of $60.0 million were pledged as collateral with the FHLB.
Federal Home Loan Bank ("FHLB") or any other institution.As of December 31, 2020, the actual duration of the Company's available for sale securities were significantly shorter than the notional maturities.
There were 2 investment securities as of December 31, 2019, in which the fair value of the security was less than the amortized cost of the security. There were 0 such investment securities as of December 31, 2020.
The following table provides information regarding investment securities with unrealized losses, aggregated by investment category and length of time that individual securities hadhave been in a continuous unrealized loss position at December 31, 2017 and 2016:
| | | | Length of Time in Continuous Unrealized Loss Position | | | | | | | ||||||||||||||||||||||||||||||||||||||||||||||
| | | | Less Than 12 Months | | | 12 Months or More | | | Total | | |||||||||||||||||||||||||||||||||||||||||||||
| | | | Fair Value | | | Unrealized Loss | | | Percent Decline from Amortized Cost | | | Fair Value | | | Unrealized Loss | | | Percent Decline from Amortized Cost | | | Fair Value | | | Unrealized Loss | | | Percent Decline from Amortized Cost | | |||||||||||||||||||||||||||
| | | | (In thousands) | | |||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Government and agency obligations | | | | $ | 70,419 | | | | | | (225) | | | | | | 0.32% | | | | | $ | 2,064 | | | | | | (35) | | | | | | 1.67% | | | | | $ | 72,483 | | | | | $ | (260) | | | | | | 0.36% | | |
| State agency and municipal obligations | | | | | 92 | | | | | | — | | | | | | 0.16 | | | | | | 656 | | | | | | (27) | | | | | | 3.95 | | | | | | 748 | | | | | | (27) | | | | | | 3.50 | | |
| Corporate bonds | | | | | — | | | | | | — | | | | | | — | | | | | | 995 | | | | | | (5) | | | | | | 0.50 | | | | | | 995 | | | | | | (5) | | | | | | 0.50 | | |
| Total investment securities | | | | $ | 70,511 | | | | | $ | (225) | | | | | | 0.32% | | | | | $ | 3,715 | | | | | $ | (67) | | | | | | 1.77% | | | | | $ | 74,226 | | | | | $ | (292) | | | | | | 0.39% | | |
| December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Government and agency obligations | | | | $ | 3,045 | | | | | $ | (54) | | | | | | 1.74% | | | | | $ | — | | | | | $ | — | | | | | | — | | | | | $ | 3,045 | | | | | $ | (54) | | | | | | 1.74% | | |
| State agency and municipal obligations | | | | | 2,756 | | | | | | (123) | | | | | | 4.29 | | | | | | — | | | | | | — | | | | | | — | | | | | | 2,756 | | | | | | (123) | | | | | | 4.29 | | |
| Corporate bonds | | | | | 978 | | | | | | (23) | | | | | | 2.25 | | | | | | — | | | | | | — | | | | | | — | | | | | | 978 | | | | | | (23) | | | | | | 2.25 | | |
| Total investment securities | | | | $ | 6,779 | | | | | $ | (200) | | | | | | 2.86% | | | | | $ | — | | | | | $ | — | | | | | | — | | | | | $ | 6,779 | | | | | $ | (200) | | | | | | 2.86% | | |
| | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Length of Time in Continuous Unrealized Loss Position | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value | Unrealized Loss | Percent Decline from Amortized Cost | Fair Value | Unrealized Loss | Percent Decline from Amortized Cost | Fair Value | Unrealized Loss | Percent Decline from Amortized Cost | |||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Government and agency obligations | $ | 99 | $ | (1) | 1.01 | % | $ | 998 | $ | (1) | 0.13 | % | $ | 1,097 | $ | (2) | 0.21 | % | |||||||||||||||||||||||||||||||||||
| Total investment securities | $ | 99 | $ | (1) | 1.01 | % | $ | 998 | $ | (1) | 0.13 | % | $ | 1,097 | $ | (2) | 0.21 | % | |||||||||||||||||||||||||||||||||||
81
5. Loans Receivable and Allowance for Loan Losses
The following table sets forth a summary of the loan portfolio at December 31, 20172020 and 2016:December 31, 2019:
| | | December 31, 2017 | | December 31, 2016 | | |||||||||||||||||||||||||||||||||||||||||||
| | | Originated | | Acquired | | Total | | Originated | | Acquired | | Total | | |||||||||||||||||||||||||||||||||||
| | | (In thousands) | | |||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Real estate loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Real estate loans: | |||||||||||||||||
| Residential | | | $ | 186,107 | | | | $ | 7,417 | | | | $ | 193,524 | | | | $ | 187,098 | | | | $ | 8,631 | | | | $ | 195,729 | | Residential | $ | 113,557 | $ | 147,109 | |||||||||||||
| Commercial | | | | 945,277 | | | | | 41,965 | | | | | 987,242 | | | | | 802,156 | | | | | 43,166 | | | | | 845,322 | | Commercial | 1,148,383 | 1,128,614 | |||||||||||||||
| Construction | | | | 101,636 | | | | | — | | | | | 101,636 | | | | | 107,329 | | | | | 112 | | | | | 107,441 | | | Construction | 87,007 | 98,583 | ||||||||||||||
| | | | | 1,233,020 | | | | | 49,382 | | | | | 1,282,402 | | | | | 1,096,583 | | | | | 51,909 | | | | | 1,148,492 | | ||||||||||||||||||
| 1,348,947 | 1,374,306 | |||||||||||||||||||||||||||||||||||||||||||||||
| Commercial business | | | | 249,719 | | | | | 10,276 | | | | | 259,995 | | | | | 198,456 | | | | | 17,458 | | | | | 215,914 | | 276,601 | 230,028 | ||||||||||||||||
| Consumer | | | | 192 | | | | | 427 | | | | | 619 | | | | | 672 | | | | | 861 | | | | | 1,533 | | | Consumer | 79 | 150 | ||||||||||||||
| Total loans | | | | 1,482,931 | | | | | 60,085 | | | | | 1,543,016 | | | | | 1,295,711 | | | | | 70,228 | | | | | 1,365,939 | | Total loans | 1,625,627 | 1,604,484 | |||||||||||||||
| Allowance for loan losses | | | | (18,848) | | | | | (56) | | | | | (18,904) | | | | | (17,883) | | | | | (99) | | | | | (17,982) | | Allowance for loan losses | (21,009) | (13,509) | |||||||||||||||
| Deferred loan origination fees, net | | | | (3,242) | | | | | — | | | | | (3,242) | | | | | (4,071) | | | | | — | | | | | (4,071) | | Deferred loan origination fees, net | (2,946) | (2,137) | |||||||||||||||
| Unamortized loan premiums | | | | 8 | | | | | — | | | | | 8 | | | | | 9 | | | | | — | | | | | 9 | | | Unamortized loan premiums | 0 | 2 | ||||||||||||||
| Loans receivable, net | | | $ | 1,460,849 | | | | $ | 60,029 | | | | $ | 1,520,878 | | | | $ | 1,273,766 | | | | $ | 70,129 | | | | $ | 1,343,895 | | Loans receivable, net | $ | 1,601,672 | $ | 1,588,840 | |||||||||||||
| | ||||||||||||||||||||||||||||||||||||||||||||||||
(1) The December 31, 2020 balance includes $34.8 million of PPP loans made under the CARES Act.
Lending activities are conducted principally in the New York metropolitan area includingand throughout Connecticut, with the majority in Fairfield and New Haven County regionsCounties of Connecticut, and consist of residential and commercial real estate loans, commercial business loans and, to a lesser degree, a variety of consumer loans. Loans may also be granted for the construction of residential homes and commercial properties. All residential andThe majority of commercial mortgage loans are collateralized by first or second mortgages on real estate.
| | | | 2017 | | | 2016 | | ||||||
| | | | (In thousands) | | |||||||||
| Balance at beginning of period | | | | $ | 666 | | | | | $ | 871 | | |
| Accretion | | | | | (113) | | | | | | (154) | | |
| Other(a) | | | | | — | | | | | | (51) | | |
| Balance at end of period | | | | $ | 553 | | | | | $ | 666 | | |
| | |||||||||||||
Risk management
The Company has established credit policies applicable to each type of lending activity in which it engages. The Company evaluates the creditworthiness of each customer and extends credit of up to 80% of the market value of the collateral, depending on the borrowers’borrower's creditworthiness and the type of collateral. The borrower’s ability to service the debt is monitored on an ongoing basis. Real estate is the primary form of collateral. Other important forms of collateral are business assets, time deposits and marketable securities. While collateral provides assurance as a secondary source of repayment, the Company ordinarily requires the primary source of repayment for commercial loans, to be based on the borrower’s ability to generate continuing cash flows. In the fourth quarter of 2017 management made the strategic decision to no longer originate residential mortgage loans. 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 allowedgenerally required that generally, 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. Private mortgage insurance may have been required for that portion of the residential first mortgage loan in excess of 80% of the appraised value of the property.
Credit quality of loans and the allowance for loan losses
Management segregates the loan portfolio into portfolio segments.defined segments, which are used to develop and document a systematic method for determining its allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate.
The Company’s loan portfolio is segregated into the following portfolio segments:
Residential Real Estate: This portfolio segment consists of the origination of first mortgage loans secured by one-to-four family owner occupied residential properties for personal use located in ourthe Company's market area. This segment also includes home equity loans and home equity lines of credit secured by owner occupied one-to-four family residential properties. Loans of this type arewere written at a combined maximum of 80% of the appraised value of the property and the Company requires a first or second lien position on the property. These loans can be affected by economic conditions and the values of the underlying properties.
Commercial Real Estate: This portfolio segment includes loans secured by commercial real estate, non-owner occupiedmulti-family dwellings and investor-owned one-to-four family and multi-family dwellings for property owners and businesses.dwellings. Loans secured by commercial real estate generally have larger loan balances.balances and more credit risk than owner occupied one-to-four family mortgage loans.
82
Construction: This portfolio segment includes commercial construction loans for commercial development projects, including condominiums, apartment buildings and single family subdivisionscondominiums, as well as office buildings, retail and other income producing properties and land loans, which are loans made with land as collateral. In addition, this portfolio includes residential construction loans to individuals to finance the construction of residential dwellings for personal use located in our market area. Construction and land development financing generally involves greater credit risk than long-term financing on improved, owner-occupied or leased real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, the Company may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment through sale or refinance. Construction loans also expose the Company to the risks that improvements will not be completed on time in accordance with specifications and projected costs and that repayment will depend on the successful operation or sale of the properties, which may cause some borrowers to be unable to continue withpaying debt service, which exposes the Company to greater risk of non-payment and loss.
Commercial Business: This portfolio segment includes commercial business loans secured by assignments of corporate assets and personal guarantees of the business owners. Commercial business loans generally have higher interest rates and shorter terms than other loans, but they also have increased difficulty of loan monitoring and a higher risk of default since their repayment generally depends on the successful operation of the borrower’s business. This segment also includes PPP loans made under the CARES Act to small businesses impacted by COVID-19, to cover payroll and other operating expenses. Loans extended under the PPP are fully guaranteed by the U.S. Small Business Administration ("SBA").
Consumer: This portfolio segment includes loans secured by savings or certificate accounts, or automobiles, as well as unsecured personal loans and overdraft lines of credit. This type of loan entails greater risk than residential mortgage loans, particularly in the case of loans that are unsecured or secured by assets that depreciate rapidly.
Allowance for loan losses
The following tables set forth the activity in the Company’s allowance for loan losses for the years ended December 31, 2017, 20162020, December 31, 2019 and 2015,December 31, 2018, by portfolio segment:
| | | | Residential Real Estate | | | Commercial Real Estate | | | Construction | | | Commercial Business | | | Consumer | | | Total | | | ||||||||||||||||||||
| | | | (In thousands) | | ||||||||||||||||||||||||||||||||||||
| December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||
| Originated | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||
| Beginning balance | | | | $ | 1,802 | | | | | $ | 9,386 | | | | | $ | 2,105 | | | | | $ | 4,240 | | | | | $ | 350 | | | | | $ | 17,883 | | | | ||
| Charge-offs | | | | | — | | | | | | — | | | | | | — | | | | | | (478) | | | | | | (32) | | | | | | (510) | | | | ||
| Recoveries | | | | | 146 | | | | | | — | | | | | | — | | | | | | 4 | | | | | | 3 | | | | | | 153 | | | | ||
| Provisions | | | | | (227) | | | | | | 3,355 | | | | | | (1,198) | | | | | | (288) | | | | | | (320) | | | | | | 1,322 | | | | ||
| Ending balance | | | | $ | 1,721 | | | | | $ | 12,741 | | | | | $ | 907 | | | | | $ | 3,478 | | | | | $ | 1 | | | | | $ | 18,848 | | | | ||
| Acquired | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||
| Beginning balance | | | | $ | — | | | | | $ | 29 | | | | | $ | — | | | | | $ | 43 | | | | | $ | 27 | | | | | $ | 99 | | | | ||
| Charge-offs | | | | | — | | | | | | — | | | | | | — | | | | | | (43) | | | | | | (19) | | | | | | (62) | | | | ||
| Recoveries | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | ||
| Provisions | | | | | — | | | | | | 7 | | | | | | — | | | | | | 20 | | | | | | (8) | | | | | | 19 | | | | ||
| Ending balance | | | | $ | — | | | | | $ | 36 | | | | | $ | — | | | | | $ | 20 | | | | | $ | — | | | | | $ | 56 | | | | ||
| Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||
| Beginning balance | | | | $ | 1,802 | | | | | $ | 9,415 | | | | | $ | 2,105 | | | | | $ | 4,283 | | | | | $ | 377 | | | | | $ | 17,982 | | | | ||
| Charge-offs | | | | | — | | | | | | — | | | | | | — | | | | | | (521) | | | | | | (51) | | | | | | (572) | | | | ||
| Recoveries | | | | | 146 | | | | | | — | | | | | | — | | | | | | 4 | | | | | | 3 | | | | | | 153 | | | | ||
| Provisions | | | | | (227) | | | | | | 3,362 | | | | | | (1,198) | | | | | | (268) | | | | | | (328) | | | | | | 1,341 | | | | ||
| Ending balance | | | | $ | 1,721 | | | | | $ | 12,777 | | | | | $ | 907 | | | | | $ | 3,498 | | | | | $ | 1 | | | | | $ | 18,904 | | | | ||
| | ||||||||||||||||||||||||||||||||||||||||
| | | | Residential Real Estate | | | Commercial Real Estate | | | Construction | | | Commercial Business | | | Consumer | | | Total | | | ||||||||||||||||||||
| | | | (In thousands) | | ||||||||||||||||||||||||||||||||||||
| December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||
| Originated | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||
| Beginning balance | | | | $ | 1,618 | | | | | $ | 7,693 | | | | | $ | 1,504 | | | | | $ | 3,310 | | | | | $ | 3 | | | | | $ | 14,128 | | | | ||
| Charge-offs | | | | | — | | | | | | — | | | | | | — | | | | | | (59) | | | | | | (10) | | | | | | (69) | | | | ||
| Recoveries | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 8 | | | | | | 8 | | | | ||
| Provisions | | | | | 184 | | | | | | 1,693 | | | | | | 601 | | | | | | 989 | | | | | | 349 | | | | | | 3,816 | | | | ||
| Ending balance | | | | $ | 1,802 | | | | | $ | 9,386 | | | | | $ | 2,105 | | | | | $ | 4,240 | | | | | $ | 350 | | | | | $ | 17,883 | | | | ||
| Acquired | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||
| Beginning balance | | | | $ | — | | | | | $ | 12 | | | | | $ | — | | | | | $ | 24 | | | | | $ | 5 | | | | | $ | 41 | | | | ||
| Charge-offs | | | | | — | | | | | | — | | | | | | (7) | | | | | | (10) | | | | | | (25) | | | | | | (42) | | | | ||
| Recoveries | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 2 | | | | | | 2 | | | | ||
| Provisions | | | | | — | | | | | | 17 | | | | | | 7 | | | | | | 29 | | | | | | 45 | | | | | | 98 | | | | ||
| Ending balance | | | | $ | — | | | | | $ | 29 | | | | | $ | — | | | | | $ | 43 | | | | | $ | 27 | | | | | $ | 99 | | | | ||
| Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||
| Beginning balance | | | | $ | 1,618 | | | | | $ | 7,705 | | | | | $ | 1,504 | | | | | $ | 3,334 | | | | | $ | 8 | | | | | $ | 14,169 | | | | ||
| Charge-offs | | | | | — | | | | | | — | | | | | | (7) | | | | | | (69) | | | | | | (35) | | | | | | (111) | | | | ||
| Recoveries | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 10 | | | | | | 10 | | | | ||
| Provisions | | | | | 184 | | | | | | 1,710 | | | | | | 608 | | | | | | 1,018 | | | | | | 394 | | | | | | 3,914 | | | | ||
| Ending balance | | | | $ | 1,802 | | | | | $ | 9,415 | | | | | $ | 2,105 | | | | | $ | 4,283 | | | | | $ | 377 | | | | | $ | 17,982 | | | | ||
| | ||||||||||||||||||||||||||||||||||||||||
| Residential Real Estate | Commercial Real Estate | Construction | Commercial Business | Consumer | Total | ||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||
| For the Year Ended December 31, 2020 | |||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 730 | $ | 10,551 | $ | 324 | $ | 1,903 | $ | 1 | $ | 13,509 | |||||||||||||||||||||||
| Charge-offs | 0 | 0 | 0 | (83) | (40) | (123) | |||||||||||||||||||||||||||||
| Recoveries | 0 | 15 | 0 | 0 | 3 | 18 | |||||||||||||||||||||||||||||
| (Credits) Provisions | (120) | 5,859 | (103) | 1,933 | 36 | 7,605 | |||||||||||||||||||||||||||||
| Ending balance | $ | 610 | $ | 16,425 | $ | 221 | $ | 3,753 | $ | 0 | $ | 21,009 | |||||||||||||||||||||||
| Residential Real Estate | Commercial Real Estate | Construction | Commercial Business | Consumer | Total | ||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||
| For the Year Ended December 31, 2019 | |||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 857 | $ | 11,562 | $ | 140 | $ | 2,902 | $ | 1 | $ | 15,462 | |||||||||||||||||||||||
| Charge-offs | (875) | (594) | 0 | (897) | (75) | (2,441) | |||||||||||||||||||||||||||||
| Recoveries | 0 | 0 | 0 | 19 | 32 | 51 | |||||||||||||||||||||||||||||
| Provisions (Credits) | 748 | (417) | 184 | (121) | 43 | 437 | |||||||||||||||||||||||||||||
| Ending balance | $ | 730 | $ | 10,551 | $ | 324 | $ | 1,903 | $ | 1 | $ | 13,509 | |||||||||||||||||||||||
83
| Residential Real Estate | Commercial Real Estate | Construction | Commercial Business | Consumer | Total | ||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||
| For the Year Ended December 31, 2018 | |||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 1,721 | $ | 12,777 | $ | 907 | $ | 3,498 | $ | 1 | $ | 18,904 | |||||||||||||||||||||||
| Charge-offs | (420) | (5,614) | 0 | (815) | (77) | (6,926) | |||||||||||||||||||||||||||||
| Recoveries | 0 | 18 | 0 | 19 | 7 | 44 | |||||||||||||||||||||||||||||
| (Credits) provisions | (444) | 4,381 | (767) | 200 | 70 | 3,440 | |||||||||||||||||||||||||||||
| Ending balance | $ | 857 | $ | 11,562 | $ | 140 | $ | 2,902 | $ | 1 | $ | 15,462 | |||||||||||||||||||||||
| | | | Residential Real Estate | | | Commercial Real Estate | | | Construction | | | Commercial Business | | | Consumer | | | Total | | | ||||||||||||||||||||
| | | | (In thousands) | | ||||||||||||||||||||||||||||||||||||
| December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||
| Originated | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||
| Beginning balance | | | | $ | 1,636 | | | | | $ | 5,480 | | | | | $ | 1,102 | | | | | $ | 2,638 | | | | | $ | 4 | | | | | $ | 10,860 | | | | ||
| Charge-offs | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | (6) | | | | | | (6) | | | | ||
| Recoveries | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 7 | | | | | | 7 | | | | ||
| Provisions | | | | | (18) | | | | | | 2,213 | | | | | | 402 | | | | | | 672 | | | | | | (2) | | | | | | 3,267 | | | | ||
| Ending balance | | | | $ | 1,618 | | | | | $ | 7,693 | | | | | $ | 1,504 | | | | | $ | 3,310 | | | | | $ | 3 | | | | | $ | 14,128 | | | | ||
| Acquired | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||
| Beginning balance | | | | $ | — | | | | | $ | — | | | | | $ | — | | | | | $ | — | | | | | $ | — | | | | | $ | — | | | | ||
| Charge-offs | | | | | — | | | | | | — | | | | | | — | | | | | | (15) | | | | | | (9) | | | | | | (24) | | | | ||
| Recoveries | | | | | — | | | | | | — | | | | | | — | | | | | | 100 | | | | | | 2 | | | | | | 102 | | | | ||
| Provisions | | | | | — | | | | | | 12 | | | | | | — | | | | | | (61) | | | | | | 12 | | | | | | (37) | | | | ||
| Ending balance | | | | $ | — | | | | | $ | 12 | | | | | $ | — | | | | | $ | 24 | | | | | $ | 5 | | | | | $ | 41 | | | | ||
| Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||
| Beginning balance | | | | $ | 1,636 | | | | | $ | 5,480 | | | | | $ | 1,102 | | | | | $ | 2,638 | | | | | $ | 4 | | | | | $ | 10,860 | | | | ||
| Charge-offs | | | | | — | | | | | | — | | | | | | — | | | | | | (15) | | | | | | (15) | | | | | | (30) | | | | ||
| Recoveries | | | | | — | | | | | | — | | | | | | — | | | | | | 100 | | | | | | 9 | | | | | | 109 | | | | ||
| Provisions | | | | | (18) | | | | | | 2,225 | | | | | | 402 | | | | | | 611 | | | | | | 10 | | | | | | 3,230 | | | | ||
| Ending balance | | | | $ | 1,618 | | | | | $ | 7,705 | | | | | $ | 1,504 | | | | | $ | 3,334 | | | | | $ | 8 | | | | | $ | 14,169 | | | | ||
| | ||||||||||||||||||||||||||||||||||||||||
Loans evaluated for impairment and the related allowance for loan losses as of December 31, 20172020 and 2016December 31, 2019 were as follows:
| | | Originated Loans | | Acquired Loans | | Total | ||||||||||||||||||||||||||||||||||||||||
| | | Portfolio | | Allowance | | Portfolio | | Allowance | | Portfolio | | Allowance | ||||||||||||||||||||||||||||||||||
| | | (In thousands) | ||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||
| Portfolio | Allowance | |||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2020 | December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||
| Loans individually evaluated for impairment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans individually evaluated for impairment: | ||||||||||||||||
| Residential real estate | | | $ | 4,168 | | | | $ | 8 | | | | $ | 439 | | | | $ | — | | | | $ | 4,607 | | | | $ | 8 | Residential real estate | $ | 4,604 | $ | 0 | ||||||||||||
| Commercial real estate | | | | 6,416 | | | | | 842 | | | | | 1,170 | | | | | 34 | | | | | 7,586 | | | | | 876 | Commercial real estate | 37,579 | 4,960 | ||||||||||||||
| Construction | Construction | 8,997 | 0 | |||||||||||||||||||||||||||||||||||||||||||
| Commercial business | | | | 2,126 | | | | | 51 | | | | | 534 | | | | | 20 | | | | | 2,660 | | | | | 71 | Commercial business | 6,507 | 85 | ||||||||||||||
| Subtotal | | | | 12,710 | | | | | 901 | | | | | 2,143 | | | | | 54 | | | | | 14,853 | | | | | 955 | Subtotal | 57,687 | 5,045 | ||||||||||||||
| Loans collectively evaluated for impairment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans collectively evaluated for impairment: | ||||||||||||||||
| Residential real estate | | | | 181,939 | | | | | 1,713 | | | | | 6,978 | | | | | — | | | | | 188,917 | | | | | 1,713 | Residential real estate | 108,953 | 610 | ||||||||||||||
| Commercial real estate | | | | 938,861 | | | | | 11,899 | | | | | 40,795 | | | | | 2 | | | | | 979,656 | | | | | 11,901 | Commercial real estate | 1,110,804 | 11,465 | ||||||||||||||
| Construction | | | | 101,636 | | | | | 907 | | | | | — | | | | | — | | | | | 101,636 | | | | | 907 | Construction | 78,010 | 221 | ||||||||||||||
| Commercial business | | | | 247,593 | | | | | 3,427 | | | | | 9,742 | | | | | — | | | | | 257,335 | | | | | 3,427 | Commercial business | 270,094 | 3,668 | ||||||||||||||
| Consumer | | | | 192 | | | | | 1 | | | | | 427 | | | | | — | | | | | 619 | | | | | 1 | Consumer | 79 | 0 | ||||||||||||||
| Subtotal | | | | 1,470,221 | | | | | 17,947 | | | | | 57,942 | | | | | 2 | | | | | 1,528,163 | | | | | 17,949 | Subtotal | 1,567,940 | 15,964 | ||||||||||||||
| Total | | | $ | 1,482,931 | | | | $ | 18,848 | | | | $ | 60,085 | | | | $ | 56 | | | | $ | 1,543,016 | | | | $ | 18,904 | Total | $ | 1,625,627 | $ | 21,009 | ||||||||||||
| | ||||||||||||||||||||||||||||||||||||||||||||||
As of December 31, 2020, of the $57.7 million of loans individually evaluated for impairment a total of $10.0 million of these loans were determined to not be impaired.
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| Portfolio | Allowance | ||||||||||
| (In thousands) | |||||||||||
| December 31, 2019 | |||||||||||
| Loans individually evaluated for impairment: | |||||||||||
| Residential real estate | $ | 4,020 | $ | 0 | |||||||
| Commercial real estate | 14,203 | 372 | |||||||||
| Commercial business | 4,330 | 134 | |||||||||
| Subtotal | 22,553 | 506 | |||||||||
| Loans collectively evaluated for impairment: | |||||||||||
| Residential real estate | 143,089 | 730 | |||||||||
| Commercial real estate | 1,114,411 | 10,179 | |||||||||
| Construction | 98,583 | 324 | |||||||||
| Commercial business | 225,698 | 1,769 | |||||||||
| Consumer | 150 | 1 | |||||||||
| Subtotal | 1,581,931 | 13,003 | |||||||||
| Total | $ | 1,604,484 | $ | 13,509 | |||||||
| | | | Originated Loans | | | Acquired Loans | | | Total | ||||||||||||||||||||||||||
| | | | Portfolio | | | Allowance | | | Portfolio | | | Allowance | | | Portfolio | | | Allowance | |||||||||||||||||
| | | | (In thousands) | ||||||||||||||||||||||||||||||||
| December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans individually evaluated for impairment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential real estate | | | | $ | 1,228 | | | | | $ | — | | | | | $ | 453 | | | | | $ | — | | | | | $ | 1,681 | | | | | $ | — |
| Commercial real estate | | | | | 774 | | | | | | 1 | | | | | | 144 | | | | | | 7 | | | | | | 918 | | | | | | 8 |
| Commercial business | | | | | 920 | | | | | | 5 | | | | | | 962 | | | | | | 37 | | | | | | 1,882 | | | | | | 42 |
| Consumer | | | | | 341 | | | | | | 341 | | | | | | 27 | | | | | | 27 | | | | | | 368 | | | | | | 368 |
| Subtotal | | | | | 3,263 | | | | | | 347 | | | | | | 1,586 | | | | | | 71 | | | | | | 4,849 | | | | | | 418 |
| Loans collectively evaluated for impairment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential real estate | | | | | 185,870 | | | | | | 1,802 | | | | | | 8,178 | | | | | | — | | | | | | 194,048 | | | | | | 1,802 |
| Commercial real estate | | | | | 801,382 | | | | | | 9,385 | | | | | | 43,022 | | | | | | 22 | | | | | | 844,404 | | | | | | 9,407 |
| Construction | | | | | 107,329 | | | | | | 2,105 | | | | | | 112 | | | | | | — | | | | | | 107,441 | | | | | | 2,105 |
| Commercial business | | | | | 197,536 | | | | | | 4,235 | | | | | | 16,496 | | | | | | 6 | | | | | | 214,032 | | | | | | 4,241 |
| Consumer | | | | | 331 | | | | | | 9 | | | | | | 834 | | | | | | — | | | | | | 1,165 | | | | | | 9 |
| Subtotal | | | | | 1,292,448 | | | | | | 17,536 | | | | | | 68,642 | | | | | | 28 | | | | | | 1,361,090 | | | | | | 17,564 |
| Total | | | | $ | 1,295,711 | | | | | $ | 17,883 | | | | | $ | 70,228 | | | | | $ | 99 | | | | | $ | 1,365,939 | | | | | $ | 17,982 |
| | |||||||||||||||||||||||||||||||||||
Credit quality indicators
To measure credit risk for the loan portfolios, the Company employs a credit risk rating system. This risk rating represents an assessed level of the loan’s risk based on the character and creditworthiness of the borrower/guarantor, the capacity of the borrower to adequately service the debt, any credit enhancements or additional sources of repayment, and the quality, value and coverage of the collateral, if any.
The objectives of the Company’s risk rating system are to provide the Board of Directors and senior management with an objective assessment of the overall quality of the loan portfolio, to promptly and accurately identify loans with well-defined credit weaknesses so that timely action can be taken to minimize a potential credit loss, to identify relevant trends affecting the collectability of the loan portfolio, and to isolate potential problem areas and to provide essential information for determining the adequacy of the allowance for loan losses. The Company’s credit risk rating system has nine grades, with each grade corresponding to a progressively greater risk of default. Risk ratings of 1(1) through 5(5) are Pass"pass" categories and risk ratings of 6(6) through 9(9) are criticized asset categories as defined by the regulatory agencies.
A “Special Mention”“special mention” (6) credit has a potential weakness which, if uncorrected, may result in a deterioration of the repayment prospects or inadequately protect the Company’s credit position at some time in the future. “Substandard” (7) loans (7) are credits that have a well-defined weakness or weaknesses that jeopardize the full repayment of the debt. An asset rated “Doubtful”“doubtful” (8) has all the weaknesses inherent in a substandard asset and which, in addition, make collection or liquidation in full highly questionable and improbable, when considering existing facts, conditions, and values. Loans classified as “Loss”“loss” (9) are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value; rather, it is not practical or desirable to defer writing-off this basically worthless asset even though partial recovery may be made in the future.
Risk ratings are assigned as necessary to differentiate risk within the portfolio. They are reviewed on an ongoing basis through the annual loan review process performed by Company personnel, normal renewal activity and the quarterly watchlistWatch List and watched asset report process. They are revised to reflect changes in the borrowers’borrower's financial condition and outlook, debt service coverage capability, repayment performance, collateral value and coverage as well as other considerations. In addition to internal review at multiple points, outsourced loan review opines on risk ratings with regard to the sample of loans their review covers.
85
The following table presentstables present credit risk ratings by loan segment as of December 31, 20172020 and 2016:
| | | | Commercial Credit Quality Indicators | | |||||||||||||||||||||||||||||||||||||||||||||
| | | | At December 31, 2017 | | | At December 31, 2016 | | ||||||||||||||||||||||||||||||||||||||||||
| | | | Commercial Real Estate | | | Construction | | | Commercial Business | | | Total | | | Commercial Real Estate | | | Construction | | | Commercial Business | | | Total | | ||||||||||||||||||||||||
| | | | (In thousands) | | |||||||||||||||||||||||||||||||||||||||||||||
| Originated loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | | | $ | 920,216 | | | | | $ | 101,636 | | | | | $ | 242,828 | | | | | $ | 1,264,680 | | | | | $ | 797,249 | | | | | $ | 107,329 | | | | | $ | 196,436 | | | | | $ | 1,101,014 | | |
| Special mention | | | | | 9,262 | | | | | | — | | | | | | 4,019 | | | | | | 13,281 | | | | | | 4,605 | | | | | | — | | | | | | 115 | | | | | | 4,720 | | |
| Substandard | | | | | 15,799 | | | | | | — | | | | | | 2,872 | | | | | | 18,671 | | | | | | 302 | | | | | | — | | | | | | 1,905 | | | | | | 2,207 | | |
| Doubtful | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | |
| Loss | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | |
| Total originated loans | | | | | 945,277 | | | | | | 101,636 | | | | | | 249,719 | | | | | | 1,296,632 | | | | | | 802,156 | | | | | | 107,329 | | | | | | 198,456 | | | | | | 1,107,941 | | |
| Acquired loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | | | | 40,686 | | | | | | — | | | | | | 9,742 | | | | | | 50,428 | | | | | | 41,582 | | | | | | 112 | | | | | | 16,836 | | | | | | 58,530 | | |
| Special mention | | | | | 109 | | | | | | — | | | | | | — | | | | | | 109 | | | | | | 1,584 | | | | | | — | | | | | | 86 | | | | | | 1,670 | | |
| Substandard | | | | | 1,170 | | | | | | — | | | | | | 425 | | | | | | 1,595 | | | | | | — | | | | | | — | | | | | | 536 | | | | | | 536 | | |
| Doubtful | | | | | — | | | | | | — | | | | | | 109 | | | | | | 109 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | |
| Loss | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | |
| Total acquired loans | | | | | 41,965 | | | | | | — | | | | | | 10,276 | | | | | | 52,241 | | | | | | 43,166 | | | | | | 112 | | | | | | 17,458 | | | | | | 60,736 | | |
| Total loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | | | | 960,902 | | | | | | 101,636 | | | | | | 252,570 | | | | | | 1,315,108 | | | | | | 838,831 | | | | | | 107,441 | | | | | | 213,272 | | | | | | 1,159,544 | | |
| Special mention | | | | | 9,371 | | | | | | — | | | | | | 4,019 | | | | | | 13,390 | | | | | | 6,189 | | | | | | — | | | | | | 201 | | | | | | 6,390 | | |
| Substandard | | | | | 16,969 | | | | | | — | | | | | | 3,297 | | | | | | 20,266 | | | | | | 302 | | | | | | — | | | | | | 2,441 | | | | | | 2,743 | | |
| Doubtful | | | | | — | | | | | | — | | | | | | 109 | | | | | | 109 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | |
| Loss | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | |
| Total loans | | | | $ | 987,242 | | | | | $ | 101,636 | | | | | $ | 259,995 | | | | | $ | 1,348,873 | | | | | $ | 845,322 | | | | | $ | 107,441 | | | | | $ | 215,914 | | | | | $ | 1,168,677 | | |
| | |||||||||||||||||||||||||||||||||||||||||||||||||
| | | | Residential and Consumer Credit Quality Indicators | | |||||||||||||||||||||||||||||||||
| | | | At December 31, 2017 | | | At December 31, 2016 | | ||||||||||||||||||||||||||||||
| | | | Residential Real Estate | | | Consumer | | | Total | | | Residential Real Estate | | | Consumer | | | Total | | ||||||||||||||||||
| | | | (In thousands) | | |||||||||||||||||||||||||||||||||
| Originated loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | | | $ | 181,939 | | | | | $ | 192 | | | | | $ | 182,131 | | | | | $ | 185,252 | | | | | $ | 331 | | | | | $ | 185,583 | | |
| Special mention | | | | | — | | | | | | — | | | | | | — | | | | | | 216 | | | | | | — | | | | | | 216 | | |
| Substandard | | | | | 4,168 | | | | | | — | | | | | | 4,168 | | | | | | 1,630 | | | | | | — | | | | | | 1,630 | | |
| Doubtful | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | |
| Loss | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 341 | | | | | | 341 | | |
| Total originated loans | | | | | 186,107 | | | | | | 192 | | | | | | 186,299 | | | | | | 187,098 | | | | | | 672 | | | | | | 187,770 | | |
| Acquired loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | | | | 6,978 | | | | | | 427 | | | | | | 7,405 | | | | | | 7,646 | | | | | | 835 | | | | | | 8,481 | | |
| Special mention | | | | | — | | | | | | — | | | | | | — | | | | | | 49 | | | | | | — | | | | | | 49 | | |
| Substandard | | | | | 439 | | | | | | — | | | | | | 439 | | | | | | 936 | | | | | | 2 | | | | | | 938 | | |
| Doubtful | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | |
| Loss | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 24 | | | | | | 24 | | |
| Total acquired loans | | | | | 7,417 | | | | | | 427 | | | | | | 7,844 | | | | | | 8,631 | | | | | | 861 | | | | | | 9,492 | | |
| Total loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | | | | 188,917 | | | | | | 619 | | | | | | 189,536 | | | | | | 192,898 | | | | | | 1,166 | | | | | | 194,064 | | |
| Special mention | | | | | — | | | | | | — | | | | | | — | | | | | | 265 | | | | | | — | | | | | | 265 | | |
| Substandard | | | | | 4,607 | | | | | | — | | | | | | 4,607 | | | | | | 2,566 | | | | �� | | 2 | | | | | | 2,568 | | |
| Doubtful | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | |
| Loss | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 365 | | | | | | 365 | | |
| Total loans | | | | $ | 193,524 | | | | | $ | 619 | | | | | $ | 194,143 | | | | | $ | 195,729 | | | | | $ | 1,533 | | | | | $ | 197,262 | | |
| | |||||||||||||||||||||||||||||||||||||
| Commercial Credit Quality Indicators | |||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
| Commercial Real Estate | Construction | Commercial Business | Total | Commercial Real Estate | Construction | Commercial Business | Total | ||||||||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 1,105,825 | $ | 78,010 | $ | 269,728 | $ | 1,453,563 | $ | 1,104,164 | $ | 98,583 | $ | 208,932 | $ | 1,411,679 | |||||||||||||||||||||||||||||||
| Special mention | 12,560 | 0 | 2,055 | 14,615 | 10,247 | 0 | 16,766 | 27,013 | |||||||||||||||||||||||||||||||||||||||
| Substandard | 29,998 | 8,997 | 3,247 | 42,242 | 14,203 | 0 | 854 | 15,057 | |||||||||||||||||||||||||||||||||||||||
| Doubtful | 0 | 0 | 1,571 | 1,571 | 0 | 0 | 3,476 | 3,476 | |||||||||||||||||||||||||||||||||||||||
| Loss | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||
| Total loans | $ | 1,148,383 | $ | 87,007 | $ | 276,601 | $ | 1,511,991 | $ | 1,128,614 | $ | 98,583 | $ | 230,028 | $ | 1,457,225 | |||||||||||||||||||||||||||||||
| Residential and Consumer Credit Quality Indicators | |||||||||||||||||||||||||||||||||||
| December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||
| Residential Real Estate | Consumer | Total | Residential Real Estate | Consumer | Total | ||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||
| Pass | $ | 108,953 | $ | 79 | $ | 109,032 | $ | 143,089 | $ | 150 | $ | 143,239 | |||||||||||||||||||||||
| Special mention | 713 | 0 | 713 | 0 | 0 | 0 | |||||||||||||||||||||||||||||
| Substandard | 3,714 | 0 | 3,714 | 3,832 | 0 | 3,832 | |||||||||||||||||||||||||||||
| Doubtful | 177 | 0 | 177 | 188 | 0 | 188 | |||||||||||||||||||||||||||||
| Loss | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||
| Total loans | $ | 113,557 | $ | 79 | $ | 113,636 | $ | 147,109 | $ | 150 | $ | 147,259 | |||||||||||||||||||||||
Loan portfolio aging analysis
When a loan is 15 days past due, the Company sends the borrower a late notice. The Company also contactsattempts to contact the borrower by phone if the delinquency is not corrected promptly after the notice has been sent.
When the loan is 30 days past due, the Company mails the borrower a letter reminding the borrower of the delinquency, and attempts to contact the borrower personally to determine the reason for the delinquency and ensure the borrower understands the terms of the loan. If necessary, subsequentafter the 90th day of delinquency, the Company may take other appropriate legal action. A summary report of all loans 30 days or more past due is provided to the boardBoard of directorsDirectors of the Company each month.periodically. Loans greater than 90 days past due are generally put on nonaccrual status. A nonaccrual loan is restored to accrual status when it is no longer delinquent and collectability of interest and principal is no longer in doubt. A loan is considered to be no longer delinquent when timely payments are made for a period of at least six months (one year for loans providing for quarterly or semi-annual payments) by the borrower in accordance with the contractual terms. Loans that are granted payment deferrals under the CARES Act are not required to be reported as past due or placed on non-accrual status if the criteria under section 4013 of the CARES Act are met.
The following tables set forth certain information with respect to ourthe Company's loan portfolio delinquencies by portfolio segment and amount as of December 31, 20172020 and December 31, 2016:2019:
| | | As of December 31, 2017 | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | 31 – 60 Days Past Due | | 61 – 90 Days Past Due | | Greater Than 90 Days | | Total Past Due | | Current | | Total Loans | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | (In thousands) | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Originated Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 30–59 Days Past Due | 60–89 Days Past Due | 90 Days or Greater Past Due | Total Past Due | Current | Total Loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Real estate loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Real estate loans: | |||||||||||||||||||||||||||||||||||||||||
| Residential real estate | | | $ | 1,092 | | | | $ | 2,244 | | | | $ | 969 | | | | $ | 4,305 | | | | $ | 181,802 | | | | $ | 186,107 | | Residential real estate | $ | 245 | $ | 0 | $ | 177 | $ | 422 | $ | 113,135 | $ | 113,557 | |||||||||||||||||||||||||||||
| Commercial real estate | | | | 9,529 | | | | | 4,116 | | | | | 1,444 | | | | | 15,089 | | | | | 930,188 | | | | | 945,277 | | Commercial real estate | 1,305 | 193 | 2,541 | 4,039 | 1,144,344 | 1,148,383 | |||||||||||||||||||||||||||||||||||
| Construction | | | | — | | | | | — | | | | | — | | | | | — | | | | | 101,636 | | | | | 101,636 | | Construction | 8,997 | 0 | 0 | 8,997 | 78,010 | 87,007 | |||||||||||||||||||||||||||||||||||
| Commercial business | | | | 4,223 | | | | | — | | | | | 142 | | | | | 4,365 | | | | | 245,354 | | | | | 249,719 | | Commercial business | 45 | 55 | 1,526 | 1,626 | 274,975 | 276,601 | |||||||||||||||||||||||||||||||||||
| Consumer | | | | — | | | | | — | | | | | — | | | | | — | | | | | 192 | | | | | 192 | | | Consumer | 0 | 0 | 0 | 0 | 79 | 79 | ||||||||||||||||||||||||||||||||||
| Total originated loans | | | | 14,844 | | | | | 6,360 | | | | | 2,555 | | | | | 23,759 | | | | | 1,459,172 | | | | | 1,482,931 | | | |||||||||||||||||||||||||||||||||||||||||
| Acquired Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||||||||||||||||
| Real estate loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||||||||||||||||
| Residential real estate | | | | 156 | | | | | — | | | | | 192 | | | | | 348 | | | | | 7,069 | | | | | 7,417 | | ||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate | | | | 499 | | | | | — | | | | | 630 | | | | | 1,129 | | | | | 40,836 | | | | | 41,965 | | ||||||||||||||||||||||||||||||||||||||||||
| Commercial business | | | | 95 | | | | | 162 | | | | | 339 | | | | | 596 | | | | | 9,680 | | | | | 10,276 | | ||||||||||||||||||||||||||||||||||||||||||
| Consumer | | | | 3 | | | | | — | | | | | 2 | | | | | 5 | | | | | 422 | | | | | 427 | | | |||||||||||||||||||||||||||||||||||||||||
| Total acquired loans | | | | 753 | | | | | 162 | | | | | 1,163 | | | | | 2,078 | | | | | 58,007 | | | | | 60,085 | | | |||||||||||||||||||||||||||||||||||||||||
| Total loans | | | $ | 15,597 | | | | $ | 6,522 | | | | $ | 3,718 | | | | $ | 25,837 | | | | $ | 1,517,179 | | | | $ | 1,543,016 | | Total loans | $ | 10,592 | $ | 248 | $ | 4,244 | $ | 15,084 | $ | 1,610,543 | $ | 1,625,627 | |||||||||||||||||||||||||||||
| | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
86
| December 31, 2019 | |||||||||||||||||||||||||||||||||||
| 30–59 Days Past Due | 60–89 Days Past Due | 90 Days or Greater Past Due | Total Past Due | Current | Total Loans | ||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||
| Real estate loans: | |||||||||||||||||||||||||||||||||||
| Residential real estate | $ | 0 | $ | 943 | $ | 281 | $ | 1,224 | $ | 145,885 | $ | 147,109 | |||||||||||||||||||||||
| Commercial real estate | 355 | 0 | 5,935 | 6,290 | 1,122,324 | 1,128,614 | |||||||||||||||||||||||||||||
| Construction | 1,357 | 0 | 0 | 1,357 | 97,226 | 98,583 | |||||||||||||||||||||||||||||
| Commercial business | 0 | 0 | 3,455 | 3,455 | 226,573 | 230,028 | |||||||||||||||||||||||||||||
| Consumer | 0 | 0 | 0 | 0 | 150 | 150 | |||||||||||||||||||||||||||||
| Total loans | $ | 1,712 | $ | 943 | $ | 9,671 | $ | 12,326 | $ | 1,592,158 | $ | 1,604,484 | |||||||||||||||||||||||
| | | | As of December 31, 2016 | | |||||||||||||||||||||||||||||||||
| | | | 31 – 60 Days Past Due | | | 61 – 90 Days Past Due | | | Greater Than 90 Days | | | Total Past Due | | | Current | | | Total Loans | | ||||||||||||||||||
| | | | (In thousands) | | |||||||||||||||||||||||||||||||||
| Originated Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real estate loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential real estate | | | | $ | — | | | | | $ | 173 | | | | | $ | 969 | | | | | $ | 1,142 | | | | | $ | 185,956 | | | | | $ | 187,098 | | |
| Commercial real estate | | | | | 147 | | | | | | 1,848 | | | | | | 302 | | | | | | 2,297 | | | | | | 799,859 | | | | | | 802,156 | | |
| Construction | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 107,329 | | | | | | 107,329 | | |
| Commercial business | | | | | — | | | | | | — | | | | | | 378 | | | | | | 378 | | | | | | 198,078 | | | | | | 198,456 | | |
| Consumer | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 672 | | | | | | 672 | | |
| Total originated loans | | | | | 147 | | | | | | 2,021 | | | | | | 1,649 | | | | | | 3,817 | | | | | | 1,291,894 | | | | | | 1,295,711 | | |
| Acquired Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real estate loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential real estate | | | | | — | | | | | | — | | | | | | 453 | | | | | | 453 | | | | | | 8,178 | | | | | | 8,631 | | |
| Commercial real estate | | | | | 866 | | | | | | 722 | | | | | | 143 | | | | | | 1,731 | | | | | | 41,435 | | | | | | 43,166 | | |
| Construction | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 112 | | | | | | 112 | | |
| Commercial business | | | | | 99 | | | | | | 249 | | | | | | — | | | | | | 348 | | | | | | 17,110 | | | | | | 17,458 | | |
| Consumer | | | | | 6 | | | | | | — | | | | | | — | | | | | | 6 | | | | | | 855 | | | | | | 861 | | |
| Total acquired loans | | | | | 971 | | | | | | 971 | | | | | | 596 | | | | | | 2,538 | | | | | | 67,690 | | | | | | 70,228 | | |
| Total loans | | | | $ | 1,118 | | | | | $ | 2,992 | | | | | $ | 2,245 | | | | | $ | 6,355 | | | | | $ | 1,359,584 | | | | | $ | 1,365,939 | | |
| | |||||||||||||||||||||||||||||||||||||
There were no0 loans delinquent greater than 90 days and still accruing interest as of December 31, 2017 and there were no loans delinquent greater than 90 days and still accruing as of2020 or December 31, 2016.2019.
Loans on nonaccrual status
The following is a summary of nonaccrual loans by portfolio segment as of December 31, 20172020 and 2016:December 31, 2019:
| | | | December 31, | | |||||||||
| | | | 2017 | | | 2016 | | ||||||
| | | | (In thousands) | | |||||||||
| Residential real estate | | | | $ | 1,590 | | | | | $ | 1,612 | | |
| Commercial real estate | | | | | 3,371 | | | | | | 446 | | |
| Commercial business | | | | | 520 | | | | | | 538 | | |
| Consumer | | | | | — | | | | | | 341 | | |
| Total | | | | $ | 5,481 | | | | | $ | 2,937 | | |
| | |||||||||||||
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| (In thousands) | |||||||||||
| Residential real estate | $ | 1,492 | $ | 1,560 | |||||||
| Commercial real estate | 21,093 | 5,222 | |||||||||
| Commercial business | 1,834 | 3,806 | |||||||||
| Construction | 8,997 | 0 | |||||||||
| Total | $ | 33,416 | $ | 10,588 | |||||||
Interest income on originated loans that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms for the years ended December 31, 2017, 20162020, 2019 and 20152018 was $174 thousand, $17 thousand$0.8 million, $0.7 million and $25 thousand,$1.1 million, respectively. The amount of actualThere was 0 interest income recognized on these loans for the year ended December 31, 2020. There was $68 thousand, $74$44 thousand and $43$11 thousand of interest income recognized for these loans for the years ended December 31, 2017, 20162019 and 2015,2018, respectively.
At December 31, 20172020 and 2016,December 31, 2019, there were no commitments to lend additional funds to borrowers on nonaccrual status,status. Nonaccrual loans with no specific reserve totaled $17.5 million and $9.6 million at December 31, 2020 and December 31, 2019, respectively.
Impaired loans
An impaired loan is generally is one for which it is probable, based on current information, that the Company will not collect all the amounts due in accordance with the contractual terms of the loan. LoansImpaired loans are individually evaluated for impairment. When the Company classifies a problem loan as impaired, it providesevaluates whether a specific valuation allowance is required for that portion of the assetloan that is estimated to be impaired.
The following table summarizestables summarize impaired loans by portfolio segment and the average carrying amount and interest income recognized on impaired loans by portfolio segment as of December 31, 2017, 20162020, December 31, 2019 and 2015:
| | | | As of and for the Year Ended December 31, 2017 | | |||||||||||||||||||||||||||
| | | | Carrying Amount | | | Unpaid Principal Balance | | | Associated Allowance | | | Average Carrying Amount | | | Interest Income Recognized | | |||||||||||||||
| | | | (In thousands) | | |||||||||||||||||||||||||||
| Originated | | | | | | | |||||||||||||||||||||||||
| Impaired loans without a valuation allowance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential real estate | | | | $ | 3,076 | | | | | $ | 3,094 | | | | | $ | — | | | | | $ | 3,080 | | | | | $ | — | | |
| Commercial real estate | | | | | 859 | | | | | | 875 | | | | | | — | | | | | | 881 | | | | | | 11 | | |
| Construction | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | |
| Commercial business | | | | | 1,548 | | | | | | 1,548 | | | | | | — | | | | | | 1,621 | | | | | | 70 | | |
| Total impaired loans without a valuation allowance | | | | $ | 5,483 | | | | | $ | 5,517 | | | | | $ | — | | | | | $ | 5,582 | | | | | $ | 81 | | |
| Impaired loans with a valuation allowance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential real estate | | | | $ | 1,092 | | | | | $ | 1,092 | | | | | $ | 8 | | | | | $ | 1,100 | | | | | $ | — | | |
| Commercial real estate | | | | | 5,557 | | | | | | 5,557 | | | | | | 842 | | | | | | 5,603 | | | | | | 261 | | |
| Commercial business | | | | | 578 | | | | | | 578 | | | | | | 51 | | | | | | 588 | | | | | | 47 | | |
| Total impaired loans with a valuation allowance | | | | | 7,227 | | | | | | 7,227 | | | | | | 901 | | | | | | 7,291 | | | | | | 308 | | |
| Total originated impaired loans | | | | $ | 12,710 | | | | | $ | 12,744 | | | | | $ | 901 | | | | | $ | 12,873 | | | | | $ | 389 | | |
| Acquired | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired loans without a valuation allowance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential real estate | | | | $ | 439 | | | | | $ | 462 | | | | | $ | — | | | | | $ | 450 | | | | | $ | — | | |
| Commercial real estate | | | | | 982 | | | | | | 1,040 | | | | | | — | | | | | | 1,035 | | | | | | 10 | | |
| Commercial Business | | | | | 402 | | | | | | 476 | | | | | | — | | | | | | 488 | | | | | | 19 | | |
| Consumer | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | |
| Total impaired loans without a valuation allowance | | | | $ | 1,823 | | | | | $ | 1,978 | | | | | $ | — | | | | | $ | 1,973 | | | | | $ | 29 | | |
| Impaired loans with a valuation allowance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial real estate | | | | $ | 188 | | | | | $ | 188 | | | | | $ | 34 | | | | | $ | 251 | | | | | $ | — | | |
| Commercial business | | | | | 132 | | | | | | 134 | | | | | | 20 | | | | | | 285 | | | | | | — | | |
| Total impaired loans with a valuation allowance | | | | | 320 | | | | | | 322 | | | | | | 54 | | | | | | 536 | | | | | | — | | |
| Total acquired impaired loans | | | | $ | 2,143 | | | | | $ | 2,300 | | | | | $ | 54 | | | | | $ | 2,509 | | | | | $ | 29 | | |
| | |||||||||||||||||||||||||||||||
87
| As of and for the Year Ended December 31, 2020 | |||||||||||||||||||||||||||||
| Carrying Amount | Unpaid Principal Balance | Associated Allowance | Average Carrying Amount | Interest Income Recognized | |||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Impaired loans without a valuation allowance: | |||||||||||||||||||||||||||||
| Residential real estate | $ | 3,891 | $ | 4,108 | $ | — | $ | 3,985 | $ | 89 | |||||||||||||||||||
| Commercial real estate | 8,964 | 9,282 | — | 9,246 | 149 | ||||||||||||||||||||||||
| Construction | 8,997 | 8,997 | — | 8,997 | 0 | ||||||||||||||||||||||||
| Commercial business | 1,899 | 2,512 | — | 1,971 | 19 | ||||||||||||||||||||||||
| Total impaired loans without a valuation allowance | 23,751 | 24,899 | — | 24,199 | 257 | ||||||||||||||||||||||||
| Impaired loans with a valuation allowance: | |||||||||||||||||||||||||||||
| Commercial real estate | 21,035 | 21,049 | 4,960 | 20,852 | 283 | ||||||||||||||||||||||||
| Commercial business | 2,920 | 2,922 | 85 | 2,965 | 0 | ||||||||||||||||||||||||
| Total impaired loans with a valuation allowance | 23,955 | 23,971 | 5,045 | 23,817 | 283 | ||||||||||||||||||||||||
| Total impaired loans | $ | 47,706 | $ | 48,870 | $ | 5,045 | $ | 48,016 | $ | 540 | |||||||||||||||||||
| As of and for the Year Ended December 31, 2019 | |||||||||||||||||||||||||||||
| Carrying Amount | Unpaid Principal Balance | Associated Allowance | Average Carrying Amount | Interest Income Recognized | |||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Impaired loans without a valuation allowance: | |||||||||||||||||||||||||||||
| Residential real estate | $ | 4,020 | $ | 4,144 | $ | — | $ | 4,094 | $ | 123 | |||||||||||||||||||
| Commercial real estate | 8,571 | 8,859 | — | 8,250 | 203 | ||||||||||||||||||||||||
| Commercial business | 3,915 | 5,126 | — | 3,887 | 25 | ||||||||||||||||||||||||
| Total impaired loans without a valuation allowance | 16,506 | 18,129 | — | 16,231 | 351 | ||||||||||||||||||||||||
| Impaired loans with a valuation allowance: | |||||||||||||||||||||||||||||
| Commercial real estate | 5,632 | 5,647 | 372 | 5,682 | 25 | ||||||||||||||||||||||||
| Commercial business | 415 | 417 | 134 | 441 | 9 | ||||||||||||||||||||||||
| Total impaired loans with a valuation allowance | 6,047 | 6,064 | 506 | 6,123 | 34 | ||||||||||||||||||||||||
| Total impaired loans | $ | 22,553 | $ | 24,193 | $ | 506 | $ | 22,354 | $ | 385 | |||||||||||||||||||
| As of and for the Year Ended December 31, 2018 | |||||||||||||||||||||||||||||
| Carrying Amount | Unpaid Principal Balance | Associated Allowance | Average Carrying Amount | Interest Income Recognized | |||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Impaired loans without a valuation allowance: | |||||||||||||||||||||||||||||
| Residential real estate | $ | 4,520 | $ | 4,613 | $ | — | $ | 4,906 | $ | 106 | |||||||||||||||||||
| Commercial real estate | 6,383 | 12,191 | — | 11,713 | 20 | ||||||||||||||||||||||||
| Commercial business | 5,212 | 6,051 | — | 4,945 | 297 | ||||||||||||||||||||||||
| Consumer | 3 | 3 | — | 4 | 0 | ||||||||||||||||||||||||
| Total impaired loans without a valuation allowance | 16,118 | 22,858 | — | 21,568 | 423 | ||||||||||||||||||||||||
| Impaired loans with a valuation allowance: | |||||||||||||||||||||||||||||
| Residential real estate | 2,014 | 2,054 | 233 | 2,049 | 0 | ||||||||||||||||||||||||
| Commercial real estate | 943 | 945 | 133 | 684 | 25 | ||||||||||||||||||||||||
| Total impaired loans with a valuation allowance | 2,957 | 2,999 | 366 | 2,733 | 25 | ||||||||||||||||||||||||
| Total impaired loans | $ | 19,075 | $ | 25,857 | $ | 366 | $ | 24,301 | $ | 448 | |||||||||||||||||||
| | | | As of and for the Year Ended December 31, 2016 | | |||||||||||||||||||||||||||
| | | | Carrying Amount | | | Unpaid Principal Balance | | | Associated Allowance | | | Average Carrying Amount | | | Interest Income Recognized | | |||||||||||||||
| | | | (In thousands) | | |||||||||||||||||||||||||||
| Originated | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired loans without a valuation allowance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential real estate | | | | $ | 1,228 | | | | | $ | 1,238 | | | | | $ | — | | | | | $ | 1,236 | | | | | $ | 10 | | |
| Commercial real estate | | | | | 651 | | | | | | 651 | | | | | | — | | | | | | 668 | | | | | | 29 | | |
| Commercial business | | | | | 551 | | | | | | 584 | | | | | | — | | | | | | 987 | | | | | | 76 | | |
| Total impaired loans without a valuation allowance | | | | $ | 2,430 | | | | | $ | 2,473 | | | | | $ | — | | | | | $ | 2,891 | | | | | $ | 115 | | |
| Impaired loans with a valuation allowance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial real estate | | | | $ | 123 | | | | | $ | 123 | | | | | $ | 1 | | | | | $ | 128 | | | | | $ | 6 | | |
| Commercial business | | | | | 369 | | | | | | 369 | | | | | | 5 | | | | | | 417 | | | | | | 22 | | |
| Consumer | | | | | 341 | | | | | | 341 | | | | | | 341 | | | | | | 341 | | | | | | — | | |
| Total impaired loans with a valuation allowance | | | | | 833 | | | | | | 833 | | | | | | 347 | | | | | | 886 | | | | | | 28 | | |
| Total originated impaired loans | | | | $ | 3,263 | | | | | $ | 3,306 | | | | | $ | 347 | | | | | $ | 3,777 | | | | | $ | 143 | | |
| Acquired | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired loans without a valuation allowance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential real estate | | | | $ | 453 | | | | | $ | 462 | | | | | $ | — | | | | | $ | 456 | | | | | $ | 9 | | |
| Commercial Business | | | | | 572 | | | | | | 593 | | | | | | — | | | | | | 629 | | | | | | 36 | | |
| Total impaired loans without a valuation allowance | | | | $ | 1,025 | | | | | $ | 1,055 | | | | | $ | — | | | | | $ | 1,085 | | | | | $ | 45 | | |
| Impaired loans with a valuation allowance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial real estate | | | | $ | 144 | | | | | $ | 144 | | | | | $ | 7 | | | | | $ | 144 | | | | | $ | — | | |
| Commercial business | | | | | 390 | | | | | | 390 | | | | | | 37 | | | | | | 406 | | | | | | 19 | | |
| Consumer | | | | | 27 | | | | | | 27 | | | | | | 27 | | | | | | 27 | | | | | | — | | |
| Total impaired loans with a valuation allowance | | | | | 561 | | | | | | 561 | | | | | | 71 | | | | | | 577 | | | | | | 19 | | |
| Total acquired impaired loans | | | | $ | 1,586 | | | | | $ | 1,616 | | | | | $ | 71 | | | | | $ | 1,662 | | | | | $ | 64 | | |
| | |||||||||||||||||||||||||||||||
88
| | | | As of and for the Year Ended December 31, 2015 | | |||||||||||||||||||||||||||
| | | | Carrying Amount | | | Unpaid Principal Balance | | | Associated Allowance | | | Average Carrying Amount | | | Interest Income Recognized | | |||||||||||||||
| | | | (In thousands) | | |||||||||||||||||||||||||||
| Originated | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired loans without a valuation allowance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential real estate | | | | $ | 1,391 | | | | | $ | 1,393 | | | | | $ | — | | | | | $ | 1,402 | | | | | $ | 37 | | |
| Commercial real estate | | | | | 4,291 | | | | | | 4,291 | | | | | | — | | | | | | 4,308 | | | | | | 124 | | |
| Commercial business | | | | | 1,351 | | | | | | 1,372 | | | | | | — | | | | | | 1,374 | | | | | | 49 | | |
| Total impaired loans without a valuation allowance | | | | $ | 7,033 | | | | | $ | 7,056 | | | | | $ | — | | | | | $ | 7,084 | | | | | $ | 210 | | |
| Impaired loans with a valuation allowance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential real estate | | | | $ | 864 | | | | | $ | 864 | | | | | $ | 2 | | | | | $ | 864 | | | | | $ | 28 | | |
| Commercial business | | | | | 626 | | | | | | 690 | | | | | | 71 | | | | | | 673 | | | | | | 34 | | |
| Total impaired loans with a valuation allowance | | | | | 1,490 | | | | | | 1,554 | | | | | | 73 | | | | | | 1,537 | | | | | | 62 | | |
| Total originated impaired loans | | | | $ | 8,523 | | | | | $ | 8,610 | | | | | $ | 73 | | | | | $ | 8,621 | | | | | $ | 272 | | |
| Acquired | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired loans without a valuation allowance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential real estate | | | | $ | 197 | | | | | $ | 200 | | | | | $ | — | | | | | $ | 198 | | | | | $ | 2 | | |
| Commercial real estate | | | | | 611 | | | | | | 678 | | | | | | — | | | | | | 602 | | | | | | 6 | | |
| Commercial Business | | | | | 963 | | | | | | 963 | | | | | | — | | | | | | 999 | | | | | | 54 | | |
| Total impaired loans without a valuation allowance | | | | $ | 1,771 | | | | | $ | 1,841 | | | | | $ | — | | | | | $ | 1,799 | | | | | $ | 62 | | |
| Impaired loans with a valuation allowance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial real estate | | | | $ | 151 | | | | | $ | 151 | | | | | $ | 12 | | | | | $ | 151 | | | | | $ | 3 | | |
| Commercial business | | | | | 470 | | | | | | 480 | | | | | | 21 | | | | | | 506 | | | | | | 14 | | |
| Consumer | | | | | 7 | | | | | | 7 | | | | | | 5 | | | | | | 7 | | | | | | 1 | | |
| Total impaired loans with a valuation allowance | | | | | 628 | | | | | | 638 | | | | | | 38 | | | | | | 664 | | | | | | 18 | | |
| Total acquired impaired loans | | | | $ | 2,399 | | | | | $ | 2,479 | | | | | $ | 38 | | | | | $ | 2,463 | | | | | $ | 80 | | |
| | |||||||||||||||||||||||||||||||
Troubled debt restructurings (TDRs)("TDRs")
Modifications to a loan are considered to be a troubled debt restructuring when one or both of the following conditions isare met: 1) the borrower is experiencing financial difficulties and/orand 2) the modification constitutes a concession that is not in line with market rates and/or terms. Modified terms are dependent upon the financial position and needs of the individual borrower. Troubled debt restructurings are classified as impaired loans.
If a performing loan is restructured into a TDR it remains in performing status. If a nonperforming loan is restructured into a TDR, it continues to be carried in nonaccrual status. Nonaccrual classification may be removed if the borrower demonstrates compliance with the modified terms for a minimum of six months. Troubled debt restructured loans are reported
Loans classified as such for at least one year from the date of restructuring. In years after the restructuring, troubled debt restructured loans are removed from this classification if the restructuring agreement specifies a market rate of interest equal to that which would be provided to a borrower with similar credit at the time of restructuring and the loan is not deemed to be impaired based on the modified terms.
2019. The following table presentsprovides information on loans whose termsthat were modified as TDRs during the periods presented:
| | | | | | | | | | | | | | | | | | | | | | Outstanding Recorded Investment | | |||||||||||||||||||||||||||||||||
| | | | Number of Loans | | | Pre-Modification | | | Post-Modification | | |||||||||||||||||||||||||||||||||||||||||||||
| | | | 2017 | | | 2016 | | | 2015 | | | 2017 | | | 2016 | | | 2015 | | | 2017 | | | 2016 | | | 2015 | | |||||||||||||||||||||||||||
| | | | (Dollars in thousands) | | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Years ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial real estate | | | | | — | | | | | | 1 | | | | | | 3 | | | | | $ | — | | | | | $ | 62 | | | | | $ | 4,044 | | | | | $ | — | | | | | $ | 62 | | | | | $ | 4,044 | | |
| Residential real estate | | | | | 2 | | | | | | — | | | | | | — | | | | | | 2,957 | | | | | | — | | | | | | — | | | | | | 2,957 | | | | | | — | | | | | | — | | |
| Commercial business | | | | | 4 | | | | | | 2 | | | | | | 1 | | | | | | 741 | | | | | | 237 | | | | | | 39 | | | | | | 741 | | | | | | 237 | | | | | | 39 | | |
| Total | | | | | 6 | | | | | | 3 | | | | | | 4 | | | | | $ | 3,698 | | | | | $ | 299 | | | | | $ | 4,083 | | | | | $ | 3,698 | | | | | $ | 299 | | | | | $ | 4,083 | | |
| | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Outstanding Recorded Investment | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number of Loans | Pre-Modification | Post-Modification | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Years ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate | 0 | 1 | 1 | $ | 0 | $ | 4,898 | $ | 37 | $ | 0 | $ | 4,676 | $ | 29 | ||||||||||||||||||||||||||||||||||||||
| Residential real estate | 0 | 1 | 3 | 0 | 34 | 3,394 | 0 | 34 | 3,390 | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial business | 0 | 2 | 1 | 0 | 465 | 608 | 0 | 465 | 608 | ||||||||||||||||||||||||||||||||||||||||||||
| Total | 0 | 4 | 5 | $ | 0 | $ | 5,397 | $ | 4,039 | $ | 0 | $ | 5,175 | $ | 4,027 | ||||||||||||||||||||||||||||||||||||||
At December 31, 20172020 and December 31, 20162019, there were performing3 nonaccrual loans identified as TDRs totaling $1.4 million and 3 nonaccrual loans identified as TDRs totaling $1.6 million, respectively.
There were 0 loans modified in compliance with their modified terms, except for four non-accrual loans totaling $553 thousand ata troubled debt restructuring that re-defaulted during the year ended December 31, 2017 and one non-accrual loan totaling $66 thousand at2020. NaN loans previously modified as a TDR, in the amount of $1.3 million, re-defaulted during the year ended December 31, 2016.2019.
The following table provides information on how loans were modified as a TDR for the years ended December 31, 20172020, December 31, 2019 and 2016.2018.
| | | | December 31, | | |||||||||||||||
| | | | 2017 | | | 2016 | | | 2015 | | |||||||||
| | | | (In thousands) | | |||||||||||||||
| Maturity Concession | | | | $ | 638 | | | | | $ | 299 | | | | | $ | — | | |
| Maturity/amortization concession | | | | | — | | | | | | — | | | | | | 825 | | |
| Maturity and payment concession | | | | | 1,925 | | | | | | — | | | | | | 3,258 | | |
| Maturity and rate concession | | | | | 1,032 | | | | | | — | | | | | | — | | |
| Payment concession | | | | | 103 | | | | | | — | | | | | | — | | |
| Total | | | | $ | 3,698 | | | | | $ | 299 | | | | | $ | 4,083 | | |
| | |||||||||||||||||||
| December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Maturity Concession | $ | 0 | $ | 125 | $ | 0 | |||||||||||
| Maturity and payment concession | 0 | 0 | 750 | ||||||||||||||
| Maturity and rate concession | 0 | 0 | 608 | ||||||||||||||
| Payment concession | 0 | 4,676 | 2,669 | ||||||||||||||
| Rate and payment concession | 0 | 374 | 0 | ||||||||||||||
| Total | $ | 0 | $ | 5,175 | $ | 4,027 | |||||||||||
Section 4013 of the CARES Act provides relief from certain requirements under GAAP and permits a financial institution to elect to suspend troubled debt restructuring accounting, in certain circumstances, beginning March 1, 2020 and ending on the earlier of January 1, 2022, or sixty days after the national emergency concerning COVID-19 terminates. All short term loan modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any request for which there was a payment default during the year endedrelief are not considered TDRs.
As of December 31, 2017.2020, 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 total recorded investmentCompany granted initial three month payment deferral periods and, in thesesome instances, extended the initial payment deferral period. This excludes SBA loans, was $1.2 million at December 31, 2017.
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6. Premises and equipment
At December 31, 20172020 and 2016,December 31, 2019, premises and equipment consisted of the following:
| | | | December 31, | | |||||||||
| | | | 2017 | | | 2016 | | ||||||
| | | | (In thousands) | | |||||||||
| Land | | | | $ | 2,300 | | | | | $ | 2,300 | | |
| Building | | | | | 14,030 | | | | | | 14,061 | | |
| Leasehold improvements | | | | | 4,558 | | | | | | 4,532 | | |
| Furniture and fixtures | | | | | 3,096 | | | | | | 2,118 | | |
| Equipment | | | | | 4,478 | | | | | | 4,249 | | |
| Automobiles | | | | | 67 | | | | | | 67 | | |
| | | | | | 28,529 | | | | | | 27,327 | | |
| Accumulated depreciation and amortization | | | | | (10,333) | | | | | | (9,492) | | |
| Premises and equipment, net | | | | $ | 18,196 | | | | | $ | 17,835 | | |
| | |||||||||||||
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| (In thousands) | |||||||||||
| Land | $ | 850 | $ | 2,300 | |||||||
| Building | 9,866 | 14,169 | |||||||||
| Right-of-use asset | 8,591 | 10,084 | |||||||||
| Leasehold improvements | 5,418 | 5,339 | |||||||||
| Furniture and fixtures | 2,954 | 2,505 | |||||||||
| Equipment | 3,581 | 3,337 | |||||||||
| Automobiles | 67 | 67 | |||||||||
| Premises and equipment, gross | 31,327 | 37,801 | |||||||||
| Accumulated depreciation and amortization | (9,565) | (9,279) | |||||||||
| Premises and equipment, net | $ | 21,762 | $ | 28,522 | |||||||
For the years ended December 31, 2017, 20162020, December 31, 2019 and 2015,December 31, 2018, depreciation and amortization expense related to premises and equipment totaled $1.5$3.3 million, $1.7$3.4 million and $1.7 million, respectively. For the years ended December 31, 2020 and December 31, 2019, depreciation and amortization expense includes amortization of the right-of-use-asset, totaling $1.4 million for each year.
For the year ended December 31, 2020, the right-of-use asset, totaling $8.6 million, includes an impairment charge of $0.3 million related to a one-time expense for office and branch consolidation recognized during the fourth quarter of 2020. The impairment charge is included in occupancy and equipment expense on the consolidated statements of income.
For the year ended December 31, 2020, property totaling $4.3 million was transferred to assets held for sale. Reference Note 8 for more detail.
7. Leases
Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). As of December 31, 2020, the Company leases real estate for 9 branch offices under various operating lease agreements. The branch leases have maturities ranging from 2021 to 2030, some of which include options to extend the lease term. The Company is not reasonably certain to exercise these renewal options, and as a result, these optional periods are not included in determining the lease term. The weighted average remaining life of the lease term for these leases was 6.2 years as of December 31, 2020. In addition, the Company’s headquarter building (included in premises and equipment) is on land that is leased from the local municipality. As of December 31, 2020, the land lease has a remaining life of 79.7 years.
The Company utilized a weighted average discount rate of 6.0% in determining the lease liability for its branch locations and a discount rate of 5.5% for its land lease.
The total fixed operating lease costs were $2.3 million and $2.0 million for the years ended December 31, 2020 and December 31, 2019, respectively. The total variable operating lease costs were $0.1 million for each of the years ended December 31, 2020 and December 31, 2019. The right-of-use-asset, included in premises and equipment, net was $8.6 million as of December 31, 2020 and the corresponding lease liability, included in accrued expenses and other liabilities was $9.0 million as of December 31, 2020.
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Future minimum lease payments as of December 31, 2020 are as follows:
| December 31, 2020 | |||||
| (In thousands) | |||||
| 2021 | $ | 1,826 | |||
| 2022 | 1,200 | ||||
| 2023 | 1,189 | ||||
| 2024 | 773 | ||||
| 2025 | 715 | ||||
| Thereafter | 17,226 | ||||
| Total | $ | 22,929 | |||
A reconciliation of the undiscounted cash flows in the maturity table above and the lease liability recognized in the consolidated balance sheet as of December 31, 2020, is shown below:
| December 31, 2020 | |||||
| (In thousands) | |||||
| Undiscounted cash flows | $ | 22,929 | |||
| Discount effect of cash flows | (13,956) | ||||
| Lease liability | $ | 8,973 | |||
8.
Other Assets
The components of other assets as of December 31, 20172020 and 2016December 31, 2019 are summarized below:
| | | | December 31, | | |||||||||
| | | | 2017 | | | 2016 | | ||||||
| | | | (In thousands) | | |||||||||
| Deferred Compensation | | | | $ | 4,097 | | | | | $ | 3,582 | | |
| Servicing Asset | | | | | 1,113 | | | | | | — | | |
| Derivative Assets | | | | | 2,035 | | | | | | 966 | | |
| Other | | | | | 3,203 | | | | | | 2,626 | | |
| Total Other Assets | | | | $ | 10,448 | | | | | $ | 7,174 | | |
| | |||||||||||||
| December 31, 2020 | December 31, 2019 | ||||||||||
| (In thousands) | |||||||||||
| Deferred compensation | $ | 2,121 | $ | 2,763 | |||||||
| Servicing assets, net of valuation allowance | 628 | 978 | |||||||||
| Derivative assets | 4,444 | 2,266 | |||||||||
| Collateral posted related to interest rate swaps | 28,205 | 13,450 | |||||||||
| Assets held for sale | 2,613 | 0 | |||||||||
| Other | 4,759 | 2,739 | |||||||||
| Total Other Assets | $ | 42,770 | $ | 22,196 | |||||||
Deferred compensation
The Company has a non-qualified deferred compensation plan for the Board of Directors that allows for the deferral of fees earned related to services rendered for the Company. The deferred compensation balance decreased $0.6 million for the year ended December 31, 2020 compared to the year ended December 31, 2019. The decrease was primarily driven by contributions being more than offset by a decline in fair market value and withdrawals.
Loan Servicingservicing
The Bank sells loans in the secondary market and retains the abilityright to service many of these loans. The Bank earns fees for the servicing provided. Loans serviced for others are not included in the accompanying consolidated balance sheets. The balance of loans serviced for others was $122.8$109.4 million and $121.8$128.3 million at December 31, 20172020 and 2016,December 31, 2019, respectively. The risks inherent in servicing assets relate primarily to changes in the timing of prepayments that result from shifts in interest rates. The significant assumptions used in the valuation at year-end 2017December 31, 2020 for servicing assets included a discount rate of 10% and prepayment speed assumptions ranging from 3% to 16%. The significant assumptions used in the valuation at December 31, 2019 for servicing assets included a discount rate ranging from 7%10% to 12%11% and pre-paymentprepayment speed assumptions ranging from 7%3% to 9%19%.
The carrying value of loan servicing rights was $1.1$0.6 million and $0$1.0 million as of December 31, 20172020 and 2016, respectively. At December 31, 2017 the carrying value of loan servicing rights approximated the fair value.2019, respectively.
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The following table presents the changes in carrying value for loan servicing assets:
| | | | December 31, 2017 | | |||
| | | | (In thousands) | | |||
| Loan Servicing Rights: | | | | | | | |
| Balance at beginning of year | | | | $ | — | | |
| Servicing rights capitalized | | | | | 115 | | |
| Servicing rights amortized | | | | | (58) | | |
| Servicing rights not previously capitalized | | | | | 1,056 | | |
| Balance at end of year | | | | $ | 1,113 | | |
| | |||||||
| December 31, 2020 | December 31, 2019 | ||||||||||
| (In thousands) | |||||||||||
| Loan servicing rights: | |||||||||||
| Balance at beginning of year | $ | 978 | $ | 870 | |||||||
| Servicing rights capitalized | 16 | 440 | |||||||||
| Servicing rights amortized | (128) | (141) | |||||||||
| Servicing rights disposed | (338) | (153) | |||||||||
| Change in valuation allowance | 100 | (38) | |||||||||
| Balance at end of year | $ | 628 | $ | 978 | |||||||
Included in accrued expenses and other liabilities as of December 31, 2017, is $832020 and December 31, 2019, respectively, are $21 thousand and $63 thousand for loan servicing liabilities related to loans serviced for others for which the Company does not receive a servicing fee.
Assets held for sale
For the year ended December 31, 2020, the assets held for sale balance of $2.6 million consists of a Bank owned property that is currently being marketed for sale. Upon the transfer to held for sale, the asset was written down to its fair market value, less costs to sell, and a charge of $1.7 million was recognized for the year ended December 31, 2020. The impairment charge is included in occupancy and equipment expense on the consolidated statements of income. The asset held for sale is included in other assets on the consolidated balance sheets.
9.
Deposits
At December 31, 20172020 and 2016,December 31, 2019, deposits consisted of the following:
| | | December 31, | | |||||||||||||||||||||
| | | 2017 | | 2016 | | |||||||||||||||||||
| | | (In thousands) | | |||||||||||||||||||||
| December 31, | ||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Noninterest bearing demand deposit accounts | | | $ | 172,638 | | | | $ | 187,593 | | | Noninterest bearing demand deposit accounts | $ | 270,235 | $ | 191,518 | ||||||||
| Interest bearing accounts: | | | | | | | | | | | | Interest bearing accounts: | ||||||||||||
| NOW and money market | | | | 510,746 | | | | | 403,081 | | | |||||||||||||
| NOW | NOW | 101,737 | 70,020 | |||||||||||||||||||||
| Money market | Money market | 669,364 | 419,495 | |||||||||||||||||||||
| Savings | | | | 83,758 | | | | | 96,502 | | | Savings | 158,750 | 183,729 | ||||||||||
| Time certificates of deposit | | | | 631,263 | | | | | 601,861 | | | Time certificates of deposit | 627,230 | 627,141 | ||||||||||
| Total interest bearing accounts | | | | 1,225,767 | | | | | 1,101,444 | | | Total interest bearing accounts | 1,557,081 | 1,300,385 | ||||||||||
| Total deposits | | | $ | 1,398,405 | | | | $ | 1,289,037 | | | Total deposits | $ | 1,827,316 | $ | 1,491,903 | ||||||||
| | ||||||||||||||||||||||||
Maturities of time certificates of deposit as of December 31, 20172020 and 2016December 31, 2019 are summarized below:
| | | | December 31, | | |||||||||
| | | | 2017 | | | 2016 | | ||||||
| | | | (In thousands) | | |||||||||
| 2017 | | | | $ | — | | | | | $ | 323,742 | | |
| 2018 | | | | | 391,509 | | | | | | 247,517 | | |
| 2019 | | | | | 214,383 | | | | | | 29,778 | | |
| 2020 | | | | | 24,466 | | | | | | 433 | | |
| 2021 | | | | | 373 | | | | | | 391 | | |
| 2022 | | | | | 532 | | | | | | — | | |
| | | | | $ | 631,263 | | | | | $ | 601,861 | | |
| | |||||||||||||
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| (In thousands) | |||||||||||
| 2020 | $ | 0 | $ | 430,361 | |||||||
| 2021 | 418,117 | 167,933 | |||||||||
| 2022 | 50,425 | 28,515 | |||||||||
| 2023 | 128,495 | 239 | |||||||||
| 2024 | 30,160 | 93 | |||||||||
| 2025 | 33 | 0 | |||||||||
| Total | $ | 627,230 | $ | 627,141 | |||||||
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The aggregate amount of individual certificate accounts, excludingincluding brokered deposits with balances of $250,000 or more, were approximately $153.8$353.7 million and $148.5$307.1 million at December 31, 20172020 and 2016,December 31, 2019, respectively.
Brokered certificate of deposits totaled $44.3$238.9 million and $58.2$179.8 million at December 31, 20172020 and 2016,December 31, 2019, respectively. BrokeredCertificates of deposits with balances of $250,000 or more were approximately $43.5 million and $57.0from national listing services totaled $18.4 million at December 31, 20172020 and 2016,$21.3 million at December 31, 2019. Brokered money market accounts totaled $13.5 million and $39.9 million at December 31, 2020 and 2019, respectively. Brokered deposits also include customer money reciprocal deposits for customers that desire FDIC protection and one way CDARS. Brokered deposits are utilized as an additional source of funding.
The following table summarizes interest expense by account type for the years ended December 31, 2017, 20162020, 2019 and 2015:
| | | | Years Ended December 31, | | |||||||||||||||
| | | | 2017 | | | 2016 | | | 2015 | | |||||||||
| | | | (In thousands) | | |||||||||||||||
| NOW and money market | | | | $ | 3,520 | | | | | $ | 1,945 | | | | | $ | 1,473 | | |
| Savings | | | | | 763 | | | | | | 315 | | | | | | 693 | | |
| Time certificates of deposit | | | | | 8,411 | | | | | | 6,040 | | | | | | 3,515 | | |
| Total interest expense on deposits | | | | $ | 12,694 | | | | | $ | 8,300 | | | | | $ | 5,681 | | |
| | |||||||||||||||||||
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| NOW | $ | 141 | $ | 128 | $ | 157 | |||||||||||
| Money market | 4,071 | 7,139 | 6,431 | ||||||||||||||
| Savings | 1,368 | 2,968 | 1,649 | ||||||||||||||
| Time certificates of deposit | 12,600 | 14,463 | 10,714 | ||||||||||||||
| Total interest expense on deposits | $ | 18,180 | $ | 24,698 | $ | 18,951 | |||||||||||
10.
Federal Home Loan Bank Advances and Other Borrowings
The following is a summary of FHLB advances with maturity dates and weighted average rates at December 31, 20172020 and 2016:December 31, 2019:
| | | | December 31, | | |||||||||||||||||||||
| | | | 2017 | | | 2016 | | ||||||||||||||||||
| | | | Amount Due | | | Weighted Average Rate | | | Amount Due | | | Weighted Average Rate | | ||||||||||||
| | | | (Dollars in thousands) | | |||||||||||||||||||||
| Year of Maturity: | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2017 | | | | $ | — | | | | | | —% | | | | | $ | 135,000 | | | | | | 0.73% | | |
| 2018 | | | | | 174,000 | | | | | | 1.44 | | | | | | — | | | | | | — | | |
| 2020 | | | | | 25,000 | | | | | | 1.99 | | | | | | 25,000 | | | | | | 1.99 | | |
| Total advances | | | | $ | 199,000 | | | | | | 1.51% | | | | | $ | 160,000 | | | | | | 0.92% | | |
| | |||||||||||||||||||||||||
| December 31, | |||||||||||||||||||||||
| December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||
| Amount Due | Weighted Average Rate(1) | Amount Due | Weighted Average Rate(1) | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Year of Maturity: | |||||||||||||||||||||||
| 2020 | $ | 0 | 0 | % | $ | 150,000 | 1.93 | % | |||||||||||||||
| 2021 | 175,000 | 1.84 | 0 | 0 | |||||||||||||||||||
| Total advances | $ | 175,000 | 1.84 | % | $ | 150,000 | 1.93 | % | |||||||||||||||
(1) The Company's FHLB borrowings are subject to longer term swap agreements and the weighted average rate reflects the all in swap rate under these long term swap agreements.
$150.0175 million of the above mentioned FHLB advances as of December 31, 2017 are2020 were subject to interest rate swap transactions and $125 million of the above mentioned FHLB advances as of December 31, 2019 were subject to interest rate swap transactions, see noteNote 18.
Interest expense on FHLB advances, excluding related interest on swaps, totaled $2.0 million, $1.3 million, $3.6 million and $903 thousand$3.9 million for the years ended December 31, 2017, 20162020, December 31, 2019 and 2015,December 31, 2018, 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 December 31, 2017,2020, the Company had pledged $742 million of eligible loans with a book value of $847.0 million as collateral to support borrowing capacity at the FHLB of Boston. As of December 31, 20172020, the Company has immediate availability to borrow an additional $257.6$347.9 million based on qualified collateral.
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| December 31, 2020 | |||||||||||
| Total Letter or Line of Credit | Total Outstanding | ||||||||||
| (In thousands) | |||||||||||
| FHLB | $ | 20,000 | $ | 0 | |||||||
| Atlantic Community Bankers Bank | 12,000 | 0 | |||||||||
| Zions Bank | 25,000 | 0 | |||||||||
| Texas Capital Bank | 5,000 | 0 | |||||||||
| Total | $ | 62,000 | $ | 0 | |||||||
Federal Home Loan Bank Stock
As a member of the FHLB, the Bank is required to maintain investments in their capital stock. The Bank owned 91,82778,596 shares and 79,43074,744 shares at December 31, 20172020 and 2016,December 31, 2019, respectively. There is no ready market or quoted market values for the stock and as such is classified as restricted stock. The shares have a par value of $100 and are carried on the consolidated balance sheets at cost, and evaluated for impairment, as the stock is only redeemable at par subject to the redemption practices of the FHLB.
The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) the significance of the decline in net assets of the Federal Home Loan Bank as compared to the capital stock amount and the length of time this situation has persisted; (b) commitments by the Federal Home Loan Bank to make payments required by law or regulation and the level of such payments in relation to the operating performance; (c) the impact of legislative and regulatory changes on the customer base of the Federal Home Loan Bank; and (d) the liquidity position of the Federal Home Loan Bank.
Management evaluated the stock and concluded that the stock was not impaired as of December 31, 2017 and 2016.2020 or December 31, 2019.
11.
Subordinated Debentures
On August 19, 2015, the Company completed a private placement of $25.5 million in aggregate principal amount of fixed rate subordinated notes (the “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 datedate. The Notes became callable, in part or the early redemption date.in whole, beginning August 2020.
The Notes have been structured to qualify for the Company as Tier 2 capital under regulatory guidelines. We used the net proceeds for general corporate purposes, which included maintaining liquidity at the holding company, providing equity capital to the Bank to fund balance sheet growth and ourthe Company's working capital needs. TheIn the third quarter of 2020, the Notes were assigned an investment grade rating of BBBBBB- by Kroll Bond Rating Agency, which was reaffirmed in the third quarter of 2017.
The Company leases all but three locations, plus certain equipment under operating lease agreements, which expire at various dates through 2029. In addition to rental payments, the leases require payment of property taxes and certain common area maintenance fees.
| | | | 2017 | | |||
| | | | (In thousands) | | |||
| Period Ending December 31, | | | | | | | |
| 2018 | | | | $ | 1,808 | | |
| 2019 | | | | | 1,774 | | |
| 2020 | | | | | 1,666 | | |
| 2021 | | | | | 1,561 | | |
| 2022 | | | | | 937 | | |
| Thereafter | | | | | 13,977 | | |
| | | | | $ | 21,723 | | |
| | |||||||
12. Commitments and Contingencies
Leases
Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). As of December 31, 2020, the Company leases real estate for 9 branch offices under various operating lease agreements. The branch leases have maturities ranging from 2021 to 2030, some of which include options to extend the lease term. In addition, the Company’s headquarter building is on land that is leased from the local municipality. Reference Note 7 for further detail.
Legal matters
The Company is involved in various legal proceedings which have arisen in the normal course of business. Management believes that resolution of these matters will not have a material effect on the Company’s financial condition or results of operations.
94
Off-balance sheet instruments
In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the financial statements. The contractual amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The contractual amounts of commitments to extend credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customers default, and the value of any existing collateral becomes worthless. Management uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments and evaluates each customer’s creditworthiness on a case-by-case basis. Management believes that they control the credit risk of these financial instruments through credit approvals, credit limits, monitoring procedures and the receipt of collateral as deemed necessary.
Financial instruments whose contract amounts represented credit risk at December 31, 20172020 and 2016December 31, 2019 were as follows:
| | | | December 31, | | |||||||||
| | | | 2017 | | | 2016 | | ||||||
| | | | (In thousands) | | |||||||||
| Commitments to extend credit: | | | | | | | | | | | | | |
| Loan commitments | | | | $ | 112,649 | | | | | $ | 89,825 | | |
| Undisbursed construction loans | | | | | 80,064 | | | | | | 70,526 | | |
| Unused home equity lines of credit | | | | | 7,573 | | | | | | 8,083 | | |
| | | | | $ | 200,286 | | | | | $ | 168,434 | | |
| | |||||||||||||
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| (In thousands) | |||||||||||
| Commitments to extend credit: | |||||||||||
| Loan commitments | $ | 114,574 | $ | 102,986 | |||||||
| Undisbursed construction loans | 117,457 | 80,472 | |||||||||
| Unused home equity lines of credit | 5,029 | 6,284 | |||||||||
| $ | 237,060 | $ | 189,742 | ||||||||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.contract or certain milestones in the case of construction loans or otherwise required collateral under borrowing base limits are met. Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. Since these commitments could expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counter party. Collateral held varies, but may include residential and commercial property, deposits and securities.
These commitments subject the Company to potential exposure in excess of amounts recorded in the financial statements, and therefore, management maintains a specific reserve for unfunded credit commitments. This reserve is reported as a component of accrued expenses and other liabilities in the accompanying Consolidated Balance Sheets. The reserve for unfunded commitments totaled $250$90 thousand at December 31, 2017.2020 and $120 thousand at December 31, 2019.
As of December 31, 2020, the Bank had a remaining capital commitment of $2.8 million to a Small Business Investment Company ("SBIC"). This lending fund represents a related party business entity associated with one of the Company's Directors. Contributions to this fund represent an equity investment for the Company. In addition, as of December 31, 2020, the Bank had a commitment of $0.1 million, payable evenly over three years, to a non-profit business.
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13.
Income Taxes
The components of income tax expense (benefit) for the years ended December 31, 2017, 20162020, December 31, 2019 and 2015December 31, 2018 consisted of:
| | | 2017 | | 2016 | | 2015 | | |||||||||||||||||||||||||||||
| | | (In thousands) | | |||||||||||||||||||||||||||||||||
| December 31, | ||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||
| Current provision: | | | | | | | | | | | | | | | | | Current provision: | |||||||||||||||||||
| Federal | | | $ | 7,468 | | | | $ | 6,838 | | | | $ | 5,113 | | | Federal | $ | 4,295 | $ | 4,137 | $ | 2,251 | |||||||||||||
| State | | | | 431 | | | | | 226 | | | | | 694 | | | State | 618 | 313 | 185 | ||||||||||||||||
| Total current | | | | 7,899 | | | | | 7,064 | | | | | 5,807 | | | Total current | 4,913 | 4,450 | 2,436 | ||||||||||||||||
| Deferred provision (benefit): | | | | | | | | | | | | | | | | | ||||||||||||||||||||
| Deferred (credit) provision: | Deferred (credit) provision: | |||||||||||||||||||||||||||||||||||
| Federal | | | | 3,400 | | | | | (1,104) | | | | | (1,749) | | | Federal | (3,071) | 276 | 1,284 | ||||||||||||||||
| State | | | | — | | | | | — | | | | | 783 | | | State | (445) | 0 | 0 | ||||||||||||||||
| Total deferred | | | | 3,400 | | | | | (1,104) | | | | | (966) | | | Total deferred | (3,516) | 276 | 1,284 | ||||||||||||||||
| Total income tax expense | | | $ | 11,299 | | | | $ | 5,960 | | | | $ | 4,841 | | | Total income tax expense | $ | 1,397 | $ | 4,726 | $ | 3,720 | |||||||||||||
| | ||||||||||||||||||||||||||||||||||||
In October, 2015, the Company created Bankwell Loan Servicing Group, Inc., a Passive Investment Company (“PIC”) organized for state income tax purposes. The PIC is a wholly-owned subsidiary of the Bank operating in accordance with Connecticut statutes. The PIC’s activities are limited in scope to holding and managing loans that are collateralized by real estate. Income earned by a PIC is determined in accordance with the statutory requirements for a passive investment company and the dividends paid by the PIC to the Bank are not taxable income for Connecticut income tax purposes. As a result of the formation of the PIC, the Bank no longer expects to beis currently not subject to Connecticut income taxes. State taxes are being recognized for income taxes on income earned in other states.
A reconciliation of the anticipated income tax expense, computed by applying the statutory federal income tax rate of 35%21% for the years ended December 31, 2020, December 31, 2019 and December 31, 2018 to the income before income taxes, to the amount reported in the consolidated statements of income for the years ended December 31, 2017, 20162020, December 31, 2019, and 2015December 31, 2018 was as follows:
| | | | December 31, | | |||||||||||||||
| | | | 2017 | | | 2016 | | | 2015 | | |||||||||
| | | | (In thousands) | | |||||||||||||||
| Income tax expense at statutory federal rate | | | | $ | 8,795 | | | | | $ | 6,409 | | | | | $ | 4,855 | | |
| State tax expense, net of federal tax effect | | | | | 280 | | | | | | 147 | | | | | | 566 | | |
| Statutory rate reductions | | | | | 3,270 | | | | | | — | | | | | | 811 | | |
| Income exempt from tax | | | | | (822) | | | | | | (687) | | | | | | (627) | | |
| Benefits related to stock compensation | | | | | (490) | | | | | | — | | | | | | — | | |
| Other items, net | | | | | 266 | | | | | | 91 | | | | | | 42 | | |
| Income tax expense before change in valuation allowance | | | | | 11,299 | | | | | | 5,960 | | | | | | 5,647 | | |
| Change in valuation allowance | | | | | — | | | | | | — | | | | ��� | | (806) | | |
| Income tax expense | | | | $ | 11,299 | | | | | $ | 5,960 | | | | | $ | 4,841 | | |
| | |||||||||||||||||||
| December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Income tax expense at statutory federal rate | $ | 1,533 | $ | 4,818 | $ | 4,442 | |||||||||||
| State tax expense, net of federal tax effect | 174 | 223 | 99 | ||||||||||||||
| Income exempt from tax | (345) | (368) | (403) | ||||||||||||||
| Stock compensation | 101 | (3) | (68) | ||||||||||||||
| Deferred director fees | 2 | (14) | (100) | ||||||||||||||
| Other items, net | (68) | 70 | (250) | ||||||||||||||
| Income tax expense | $ | 1,397 | $ | 4,726 | $ | 3,720 | |||||||||||
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At December 31, 20172020 and 2016,December 31, 2019, the components of deferred tax assets and liabilities were as follows:
| | | December 31, | | |||||||||||||||||||||
| | | 2017 | | 2016 | | |||||||||||||||||||
| | | (In thousands) | | |||||||||||||||||||||
| December 31, | ||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Deferred tax assets: | | | | | | | | | | | | Deferred tax assets: | ||||||||||||
| Allowance for loan losses | | | $ | 4,022 | | | | $ | 6,378 | | | Allowance for loan losses | $ | 4,724 | $ | 2,862 | ||||||||
| Net operating loss carryforwards | | | | 555 | | | | | 996 | | | Net operating loss carryforwards | 444 | 481 | ||||||||||
| Purchase accounting adjustments | | | | 14 | | | | | 20 | | | |||||||||||||
| Deferred fees | | | | 1,162 | | | | | 1,437 | | | Deferred fees | 1,433 | 1,120 | ||||||||||
| Deferred expenses | | | | — | | | | | 716 | | | |||||||||||||
| Deferred director fees | Deferred director fees | 341 | 174 | |||||||||||||||||||||
| Start-up costs | | | | 144 | | | | | 275 | | | Start-up costs | 70 | 91 | ||||||||||
| Depreciation | | | | 67 | | | | | — | | | |||||||||||||
| Unrealized loss on derivatives | Unrealized loss on derivatives | 5,246 | 2,245 | |||||||||||||||||||||
| Lease liabilities | Lease liabilities | 2,009 | 2,132 | |||||||||||||||||||||
| Other | | | | 88 | | | | | 192 | | | Other | 1,311 | 302 | ||||||||||
| Gross deferred tax assets | | | | 6,052 | | | | | 10,014 | | | Gross deferred tax assets | 15,578 | 9,407 | ||||||||||
| Deferred tax liabilities: | | | | | | | | | | | | Deferred tax liabilities: | ||||||||||||
| Deferred Expenses | | | | 482 | | | | | — | | | |||||||||||||
| Servicing Rights | | | | 216 | | | | | — | | | |||||||||||||
| Tax bad debt reserve | | | | — | | | | | 195 | | | |||||||||||||
| Deferred expenses | Deferred expenses | 774 | 671 | |||||||||||||||||||||
| Servicing rights | Servicing rights | 136 | 192 | |||||||||||||||||||||
| Core deposit intangible | Core deposit intangible | 17 | 45 | |||||||||||||||||||||
| Depreciation | | | | — | | | | | 255 | | | Depreciation | 309 | 210 | ||||||||||
| Unrealized gain on derivatives | | | | 427 | | | | | 258 | | | |||||||||||||
| Unrealized gain on available for sale securities | | | | 23 | | | | | 221 | | | Unrealized gain on available for sale securities | 786 | 247 | ||||||||||
| Right-of-use-assets | Right-of-use-assets | 1,986 | 2,117 | |||||||||||||||||||||
| Other | Other | 270 | 137 | |||||||||||||||||||||
| Gross deferred tax liabilities | | | | 1,148 | | | | | 929 | | | Gross deferred tax liabilities | 4,278 | 3,619 | ||||||||||
| Net deferred tax asset | | | $ | 4,904 | | | | $ | 9,085 | | | Net deferred tax asset | $ | 11,300 | $ | 5,788 | ||||||||
| | ||||||||||||||||||||||||
A valuation allowance against deferred tax assets is required if, based on the weight of available evidence, it is more-likely-than-not that some or all of the deferred tax assets will not be realized. Management evaluated its remaining deferred tax assets and believes no valuation allowances are needed at December 31, 2017.2020.
At December 31, 2017,2020, the Company had federal net operating loss carryovers of $2.6$2.1 million. The carryovers were transferred to the Company upon the merger with The Wilton Bank. The losses will expire after 2032 and are subject to certain annual limitations which amount to $176 thousand per annum.
Management regularly analyzes their tax positions and at December 31, 20172020 management has established a reserve for uncertain tax positions in conjunction with ourthe Company's out of state lending activity and for a potential tax liability as a result of the Company’s deferred compensation plan established for the board of directors.activity. The total reserve for uncertain tax positions totaled $393$394 thousand as of December 31, 2017.2020. The tax years 20142017 and subsequent are subject to examination by federal and state taxing authorities. The statute of limitations has expired on the years before 2014.2017. No examinations are currently in process.
The following table reflects a reconciliation of the beginning and ending balances of the Company’s uncertain tax positions:
| | | | December 31, | ||||||||||||||
| | | | 2017 | | | 2016 | | | 2015 | ||||||||
| | | | (In thousands) | ||||||||||||||
| Balance, beginning of year | | | | $ | 95 | | | | | $ | — | | | | | $ | — |
| Additions relating to potential liability with taxing authorities | | | | | 298 | | | | | | 95 | | | | | | — |
| Balance, end of year | | | | $ | 393 | | | | | $ | 95 | | | | | $ | — |
| | |||||||||||||||||
| At December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Balance, beginning of year | $ | 269 | $ | 193 | $ | 393 | |||||||||||
| Net additions (reductions) relating to potential liability with taxing authorities | 125 | 76 | (200) | ||||||||||||||
| Balance, end of year | $ | 394 | $ | 269 | $ | 193 | |||||||||||
14.
401(K) Profit Sharing Plan
The Company’s employees are eligible to participate in The Bankwell Financial Group, Inc. and its Subsidiaries and Affiliates 401(k) Plan (the “401k Plan”). The 401k Plan covers substantially all employees who are at least 21 years of age.
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Under the terms of the 401k Plan, participants can contribute up to a certain percentage of their compensation, subject to federal limitations. The Company matches eligible contributions and may make discretionary matching and/or profit sharing contributions. Participants are immediately vested in their contributions and become fully vested in the Company’s contributions after completing five years of service. The Company expensed $257$297 thousand, $227$252 thousand and $173$265 thousand related to the 401k Plan during the years ended December 31, 2017, 20162020, December 31, 2019 and 2015,December 31, 2018, respectively.
15. Earnings Per Share
Unvested restricted stock awards that contain non-forfeitable rights to dividends are participating securities and are included in the computation of EPS pursuant to the two-class method. The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. The Company’s unvested restricted stock awards qualify as participating securities.
Net income is allocated between the common stock and participating securities pursuant to the two-class method. Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period, excluding participating unvested restricted stock awards.
Diluted EPS is computed in a similar manner, except that the denominator includes the number of additional common shares that would have been outstanding if potentially dilutive common shares were issued using the treasury stock method.
The following is a reconciliation of earnings available to common shareholders and basic weighted average common shares outstanding to diluted weighted average common shares outstanding, reflecting the application of the two-class method:
| | | | For the Years Ended December 31, | | |||||||||||||||
| | | | 2017 | | | 2016 | | | 2015 | | |||||||||
| | | | (In thousands, except per share data) | | |||||||||||||||
| Net income | | | | $ | 13,830 | | | | | $ | 12,350 | | | | | $ | 9,030 | | |
| Preferred stock dividends | | | | | — | | | | | | — | | | | | | (125) | | |
Dividends to participating securities(1) | | | | | (28) | | | | | | (27) | | | | | | (5) | | |
Undistributed earnings allocated to participating securities(1) | | | | | (151) | | | | | | (211) | | | | | | (226) | | |
| Net income for earnings per share calculation | | | | $ | 13,651 | | | | | $ | 12,112 | | | | | $ | 8,674 | | |
| Weighted average shares outstanding, basic | | | | | 7,572 | | | | | | 7,396 | | | | | | 7,072 | | |
Effect of dilutive equity-based awards(2) | | | | | 98 | | | | | | 95 | | | | | | 69 | | |
| Weighted average shares outstanding, diluted | | | | | 7,670 | | | | | | 7,491 | | | | | | 7,141 | | |
| Net earnings per common share: | | | | | | | | | | | | | | | | | | | |
| Basic earnings per common share | | | | $ | 1.80 | | | | | $ | 1.64 | | | | | $ | 1.23 | | |
| Diluted earnings per common share | | | | | 1.78 | | | | | | 1.62 | | | | | | 1.21 | | |
| For the Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||
| Net income | $ | 5,904 | $ | 18,216 | $ | 17,433 | |||||||||||
Dividends to participating securities(1) | (70) | (46) | (51) | ||||||||||||||
Undistributed earnings allocated to participating securities(1) | (23) | (166) | (178) | ||||||||||||||
| Net income for earnings per share calculation | $ | 5,811 | $ | 18,004 | $ | 17,204 | |||||||||||
| Weighted average shares outstanding, basic | 7,728 | 7,757 | 7,722 | ||||||||||||||
Effect of dilutive equity-based awards(2) | 20 | 28 | 53 | ||||||||||||||
| Weighted average shares outstanding, diluted | 7,748 | 7,785 | 7,775 | ||||||||||||||
| Net earnings per common share: | |||||||||||||||||
| Basic earnings per common share | $ | 0.75 | $ | 2.32 | $ | 2.23 | |||||||||||
| Diluted earnings per common share | $ | 0.75 | $ | 2.31 | $ | 2.21 | |||||||||||
(1)
Represents dividends paid and undistributed earnings allocated to unvested stock-based awards that contain non-forfeitable rights to dividends.
(2)
Represents the effect of the assumed exercise of stock options and warrants and the vesting of restricted shares, as applicable, utilizing the treasury stock method.
16.
Stock Based Compensation Plans
Equity award plans
The Company has fivestock options or unvested restricted stock outstanding under 3 equity award plans, which are collectively referred to as the “Plan.” The current plan under which any future issuances of equity awards will be made is the 2012 BNC Financial Group, Inc. Stock Plan, or the “2012 Plan,” as amended on June 26, 2013.from time-to-time. All equity awards made under the 2012 Plan are made by means of an award agreement, which contains the specific terms and conditions of the grant. To date, all equity awards have been in the form of sharestock options or restricted stock. At December 31, 2017,2020, there were 465,262610,250 shares reserved for future issuance under the 2012 Plan.
Stock Optionsoptions: The Company accounts for stock options based on the fair value at the date of grant and records an expense over the vesting period of such awards on a straight line basis. Options vest over periods up to 5 years. For the years ended December 31, 2017, 2016, and 2015, the Company recorded expense related to options granted under the various plans of approximately $0 thousand, $9 thousand, and $14 thousand, respectively.
There were no0 options granted during the years ended December 31, 2017, 2016 and 2015.2020, December 31, 2019 or December 31, 2018.
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A summary of the status of outstanding stock options at December 31, 2017 and changes during the periods then ended, were as follows:2020 is presented below:
| | | | December 31, 2017 | | |||||||||
| | | | Number of Shares | | | Weighted Average Exercise Price | | ||||||
| Options outstanding at beginning of period | | | | | 120,988 | | | | | $ | 18.58 | | |
| Exercised | | | | | (73,738) | | | | | | 19.06 | | |
| Forfeited | | | | | (200) | | | | | | 15.00 | | |
| Options outstanding at end of period | | | | | 47,050 | | | | | | 17.83 | | |
| Options exercisable at end of period | | | | | 47,050 | | | | | | 17.83 | | |
| | |||||||||||||
| December 31, 2020 | |||||||||||
| Number of Shares | Weighted Average Exercise Price | ||||||||||
| Options outstanding at beginning of period | 16,680 | $ | 16.30 | ||||||||
| Exercised | (1,500) | 11.00 | |||||||||
| Options outstanding at end of period | 15,180 | 16.82 | |||||||||
| Options exercisable at end of period | 15,180 | 16.82 | |||||||||
Intrinsic value is the amount by which the fair value of the underlying stock exceeds the exercise price of an option on the exercise date. The total intrinsic value of sharestock options exercised during the years ended December 31, 2017, 20162020, December 31, 2019 and 2015December 31, 2018 was $1.08 million, $597$27.0 thousand, $40.0 thousand and $170,$0.4 million, respectively.
The range of exercise prices for the 47,05015,180 options exercisable at December 31, 20172020 was $11.00$15.00 to $20.81$17.86 per share. The weighted average remaining contractual life for these options was 2.81.7 years at December 31, 2017.2020. At December 31, 2017, as2020, all awarded options have vested, all of the outstanding options are exercisable, and the aggregate intrinsic value of these options was $0.8 million.$41 thousand.
| Range of Exercise Prices | | | Number of Shares | | | Weighted- Average Remaining Contractual Life (years) | | | Weighted- Average Exercise Price | | |||||||||
| $17.86 – 20.81 | | | | | 34,700 | | | | | | 2.8 | | | | | $ | 19.28 | | |
| $11.00 – 15.00 | | | | | 12,350 | | | | | | 3.0 | | | | | | 13.77 | | |
| | | | | | 47,050 | | | | | | 2.8 | | | | | $ | 17.83 | | |
| | |||||||||||||||||||
Restricted Stockstock: Restricted stock provides grantees with rights to shares of common stock upon completion of a service period. Shares of unvested restricted stock are considered participating securities. Restricted stock awards generally vest over one to five years.
The following table presents the activity for restricted stock for the year ended December 31, 2017:2020:
| | | December 31, 2017 | | |||||||||||||||||||||
| | | Number of Shares | | Weighted Average Grant Date Fair Value | | |||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||
| Number of Shares | Weighted Average Grant Date Fair Value | |||||||||||||||||||||||
| Unvested at beginning of period | | | | 96,594 | | | | $ | 19.80 | | | Unvested at beginning of period | 110,975 | (1) | $ | 30.88 | ||||||||
| Granted | | | | 40,250 | | | | | 34.03 | | | Granted | 109,199 | (2) | 23.75 | |||||||||
| Vested | | | | (43,430) | | | | | 21.35 | | | Vested | (55,080) | (3) | 30.55 | |||||||||
| Forfeited | | | | (18,228) | | | | | 20.52 | | | Forfeited | (1,725) | 31.37 | ||||||||||
| Unvested at end of period | | | | 75,186 | | | | | 26.39 | | | Unvested at end of period | 163,369 | 26.22 | ||||||||||
| | ||||||||||||||||||||||||
(1) Includes 21,750 shares of performance based restricted stock.
(2) Includes 16,000 shares of performance based restricted stock.
(3) Includes 22,651 shares of performance based restricted stock.
The total fair value of restricted stock awards vested during the year ended December 31, 20172020 was $1.5$1.2 million.
The Company’s restricted stock expense for the years ended December 31, 2017, 20162020, December 31, 2019 and 2015December 31, 2018 was $917 thousand, $1.2$1.8 million, $1.0 million and $1.0$1.3 million, respectively. At December 31, 20172020, there was $1.8$3.3 million of unrecognized stock compensation expense for restricted stock, expected to be recognized over a weighted average period of 1.81.9 years.
17.
Comprehensive Income
Comprehensive income represents the sum of net income and items of other comprehensive income or loss, including net unrealized gains or losses on securities available for sale and net unrealized gains or losses on derivatives. The Company's derivative instruments are utilized to manage economic risks, including interest rate risk. Changes in fair value of the Company's derivatives accounted for as cash flow hedges.are primarily driven by changes in interest rates and recognized in other comprehensive income. The
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Company's current derivative positions will cause a decrease to other comprehensive income in a falling interest rate environment and an increase in a rising interest rate environment. The Company’s total comprehensive income or loss for the years ended December 31, 2017, 20162020, December 31, 2019 and 2015December 31, 2018 is reported in the Consolidated Statements of Comprehensive Income.
The following tables present the changes in accumulated other comprehensive (loss) income (loss) by component, net of tax for the years ended December 31, 2017, 20162020, December 31, 2019 and 2015:December 31, 2018:
| | | | Net Unrealized Gain (Loss) on Available for Sale Securities | | | Net Unrealized Gain (Loss) on Interest Rate Swap | | | Total | | |||||||||
| | | | (In thousands) | | |||||||||||||||
| Balance at December 31, 2016 | | | | $ | 409 | | | | | $ | 481 | | | | | $ | 890 | | |
| Other comprehensive (loss) income before reclassifications, net of tax | | | | | (232) | | | | | | 843 | | | | | | 611 | | |
| Amounts reclassified from accumulated other comprehensive income, net of tax | | | | | (108) | | | | | | — | | | | | | (108) | | |
| Net other comprehensive income | | | | | (340) | | | | | | 843 | | | | | | 503 | | |
| Amount reclassified for tax rate changes | | | | | 16 | | | | | | 285 | | | | | | 301 | | |
| Balance at December 31, 2017 | | | | $ | 85 | | | | | $ | 1,609 | | | | | $ | 1,694 | | |
| | |||||||||||||||||||
| | | | Net Unrealized Gain (Loss) on Available for Sale Securities | | | Net Unrealized Gain (Loss) on Interest Rate Swap | | | Total | | |||||||||
| | | | (In thousands) | | |||||||||||||||
| Balance at December 31, 2015 | | | | $ | 405 | | | | | $ | (178) | | | | | $ | 227 | | |
| Other comprehensive (loss) income before reclassifications, net of tax | | | | | (71) | | | | | | 659 | | | | | | 588 | | |
| Amounts reclassified from accumulated other comprehensive income, net of tax | | | | | 75 | | | | | | — | | | | | | 75 | | |
| Net other comprehensive income | | | | | 4 | | | | | | 659 | | | | | | 663 | | |
| Balance at December 31, 2016 | | | | $ | 409 | | | | | $ | 481 | | | | | $ | 890 | | |
| | |||||||||||||||||||
| | | | Net Unrealized Gain (Loss) on Available for Sale Securities | | | Net Unrealized Gain (Loss) on Interest Rate Swap | | | Total | | | | |||||||
| | | | (In thousands) | | |||||||||||||||
| Balance at December 31, 2014 | | | | $ | 644 | | | | $(113) | | | $531 | | | | ||||
| Other comprehensive (loss) income before reclassifications, net of tax | | | | | (239) | | | | (65) | | | (304) | | | | ||||
| Amounts reclassified from accumulated other comprehensive income | | | | | — | | | | — | | | — | | | | ||||
| Net other comprehensive loss | | | | | (239) | | | | (65) | | | (304) | | | | ||||
| Balance at December 31, 2015 | | | | $ | 405 | | | | $(178) | | | $227 | | | | ||||
| | |||||||||||||||||||
| Net Unrealized Gain (Loss) on Available for Sale Securities | Net Unrealized Gain (Loss) on Interest Rate Swaps | Total | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Balance at December 31, 2019 | $ | 928 | $ | (8,444) | $ | (7,516) | |||||||||||
| Other comprehensive income (loss) before reclassifications, net of tax | 1,816 | (11,481) | (9,665) | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive income, net of tax | 0 | 1,606 | 1,606 | ||||||||||||||
| Net other comprehensive income (loss) | 1,816 | (9,875) | (8,059) | ||||||||||||||
| Balance at December 31, 2020 | $ | 2,744 | $ | (18,319) | $ | (15,575) | |||||||||||
| Net Unrealized Gain (Loss) on Available for Sale Securities | Net Unrealized Gain (Loss) on Interest Rate Swaps | Total | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Balance at December 31, 2018 | $ | (1,379) | $ | 342 | $ | (1,037) | |||||||||||
| Other comprehensive income (loss) before reclassifications, net of tax | 2,367 | (8,186) | (5,819) | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive income, net of tax | (60) | (600) | (660) | ||||||||||||||
| Net other comprehensive income ( loss) | 2,307 | (8,786) | (6,479) | ||||||||||||||
| Balance at December 31, 2019 | $ | 928 | $ | (8,444) | $ | (7,516) | |||||||||||
| Net Unrealized Gain (Loss) on Available for Sale Securities | Net Unrealized Gain (Loss) on Interest Rate Swaps | Total | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Balance at December 31, 2017 | $ | 85 | $ | 1,609 | $ | 1,694 | |||||||||||
| Other comprehensive loss before reclassifications, net of tax | (1,289) | (722) | (2,011) | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive income, net of tax | (175) | (545) | (720) | ||||||||||||||
| Net other comprehensive loss | (1,464) | (1,267) | (2,731) | ||||||||||||||
| Balance at December 31, 2018 | $ | (1,379) | $ | 342 | $ | (1,037) | |||||||||||
100
The following table provides information for the items reclassified from accumulated other comprehensive income or loss:
| Accumulated Other Comprehensive Income (Loss) Components | | | For the Years Ended December 31, | | | Associated Line Item in the Consolidated Statements Of Income | | |||||||||||||||
| | 2017 | | | 2016 | | | 2015 | | ||||||||||||||
| | | | (In thousands) | | | | | |||||||||||||||
| Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized gains (losses) on investments | | | | $ | 165 | | | | | $ | (115) | | | | | $ | — | | | | Gain (loss) on sale of available for sale securities, net | |
| Tax (expense) benefit | | | | | (57) | | | | | | 40 | | | | | | — | | | | Income tax expense | |
| Net of tax | | | | $ | 108 | | | | | $ | (75) | | | | | $ | — | | | | | |
| | ||||||||||||||||||||||
| Accumulated Other Comprehensive Income (Loss) Components | For the Years Ended December 31, | Associated Line Item in the Consolidated Statements Of Income | ||||||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| Available-for-sale securities: | ||||||||||||||||||||||||||
| Unrealized gains on investments | $ | 0 | $ | 76 | $ | 222 | Net gain on sale of available for sale securities | |||||||||||||||||||
| Tax expense | 0 | (16) | (47) | Income tax expense | ||||||||||||||||||||||
| Net of tax | $ | 0 | $ | 60 | $ | 175 | ||||||||||||||||||||
| Derivatives: | ||||||||||||||||||||||||||
| Unrealized (losses) gains on derivatives | $ | (2,094) | $ | 760 | $ | 690 | Interest expense on borrowings | |||||||||||||||||||
| Tax benefit (expense) | 488 | (160) | (145) | Income tax expense | ||||||||||||||||||||||
| Net of tax | $ | (1,606) | $ | 600 | $ | 545 | ||||||||||||||||||||
18.
Derivative Instruments
The Company manages economic risks, including interest rate, liquidity, and credit risk by managing the amount, sources, and duration of its funding along with the use of interest rate derivative financial instruments, namely interest rate swaps. The Company does not use derivatives for speculative purposes. As of December 31, 2017,2020, the BankCompany was a party to six9 interest rate swaps, designated as hedging instruments, to add stability to interest expense and to manage its exposure to the variability of the future cash flows attributable to the contractually specified interest rate movements.rates. The notional amount for each swap is $25 million and in each case, the BankCompany has entered into pay-fixed Libor interest rate swaps to convert rolling 90 daydays Federal Home Loan Bank advances or brokered deposits. As of December 31, 2020, the Company is party to fixed rates.4 interest rate swaps not designated as hedging instruments, to minimize interest rate risk exposure with loans to customers.
The Company accounts for itsall non-borrower related interest rate swaps as effective cash flow hedges (see Note 1).hedges. None of the interest rate swap agreements contain any credit risk related contingent features. A hedging instrument is expected at inception to be highly effective at offsetting changes in the hedged transactions attributable to the changes in the hedged risk.
Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain loan customers. The Company expectsexecutes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the hedging relationship will be highly effective; however, it doesCompany executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not assume there is no ineffectiveness. Asmeet the strict hedge accounting requirements, changes in the fair value of December 31, 2017both the customer derivatives and 2016 there was an immaterial amount of ineffectiveness as a result of these hedging relationships.the offsetting derivatives are recognized directly in earnings.
Interest Rate Swapsrate swaps with a positive fair value are recorded as other assets and interest rate swaps with a negative fair value are recorded as other liabilities on the consolidated balance sheets.Consolidated Balance Sheets.
101
Information about derivative instruments for the years ended December 31, 20172020 and 2016December 31, 2019 were as follows:
December 31, 2017:2020:
| | | | Notional Amount | | | Original Maturity | | | Received | | | Paid | | | Fair Value Asset (Liability) | | |||||||||
| | | | (Dollars in thousands) | | | | |||||||||||||||||||
| Cash flow hedge: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate swap on FHLB advance | | | | $ | 25,000 | | | | 4.7 years | | | 3-month USD LIBOR | | | | | 1.62% | | | | | $ | 62 | | |
| Interest rate swap on FHLB advance | | | | | 25,000 | | | | 5.0 years | | | 3-month USD LIBOR | | | | | 1.83% | | | | | | 105 | | |
| Interest rate swap on FHLB advance | | | | | 25,000 | | | | 5.0 years | | | 3-month USD LIBOR | | | | | 1.48% | | | | | | 398 | | |
| Interest rate swap on FHLB advance | | | | | 25,000 | | | | 5.0 years | | | 3-month USD LIBOR | | | | | 1.22% | | | | | | 793 | | |
| Interest rate swap on FHLB advance | | | | | 25,000 | | | | 7.0 years | | | 3-month USD LIBOR | | | | | 2.04% | | | | | | 342 | | |
| Interest rate swap on FHLB advance | | | | | 25,000 | | | | 7.0 years | | | 3-month USD LIBOR | | | | | 2.04% | | | | | | 334 | | |
| | | | | $ | 150,000 | | | | | | | | | | | | | | | | | $ | 2,034 | | |
| | |||||||||||||||||||||||||
| Original Notional Amount | Original Maturity | Maturity Date | Received | Paid | Fair Value Asset (Liability) | ||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments: | |||||||||||||||||||||||||||||||||||
| Interest rate swap | $ | 25,000 | 5.0 years | July 1, 2021 | 3-month USD LIBOR | 1.22 | % | $ | (128) | ||||||||||||||||||||||||||
| Interest rate swap | 25,000 | 3.0 years | December 23, 2022 | 3-month USD LIBOR | 1.28 | % | (541) | ||||||||||||||||||||||||||||
| Interest rate swap | 25,000 | 7.0 years | August 25, 2024 | 3-month USD LIBOR | 2.04 | % | (1,622) | ||||||||||||||||||||||||||||
| Interest rate swap | 25,000 | 7.0 years | August 25, 2024 | 3-month USD LIBOR | 2.04 | % | (1,618) | ||||||||||||||||||||||||||||
| Interest rate swap | 25,000 | 5.0 years | April 9, 2025 | 3-month USD LIBOR | 0.55 | % | (224) | ||||||||||||||||||||||||||||
| Interest rate swap | 25,000 | 5.0 years | April 23, 2025 | 3-month USD LIBOR | 0.54 | % | (212) | ||||||||||||||||||||||||||||
| Interest rate swap | 25,000 | 15.0 years | January 1, 2034 | 3-month USD LIBOR | 3.01 | % | (6,086) | ||||||||||||||||||||||||||||
| Interest rate swap | 25,000 | 15.0 years | January 1, 2035 | 3-month USD LIBOR | 3.03 | % | (6,445) | ||||||||||||||||||||||||||||
| Interest rate swap | 25,000 | 15.0 years | August 26, 2035 | 3-month USD LIBOR | 3.05 | % | (6,691) | ||||||||||||||||||||||||||||
| $ | 225,000 | $ | (23,567) | ||||||||||||||||||||||||||||||||
Derivatives not designated as hedging instruments:(1) | |||||||||||||||||||||||||||||||||||
| Interest rate swap | $ | 18,500 | 10.0 years | March 10, 2030 | 1-month USD LIBOR | 3.15 | % | $ | (648) | ||||||||||||||||||||||||||
| Interest rate swap | 18,500 | 10.0 years | March 10, 2030 | 1-month USD LIBOR | 3.15 | % | 648 | ||||||||||||||||||||||||||||
| Interest rate swap | 20,000 | 20.0 years | March 10, 2039 | 1-month USD LIBOR | 5.00 | % | (3,796) | ||||||||||||||||||||||||||||
| Interest rate swap | 20,000 | 20.0 years | March 10, 2039 | 1-month USD LIBOR | 5.00 | % | 3,796 | ||||||||||||||||||||||||||||
| $ | 77,000 | $ | 0 | ||||||||||||||||||||||||||||||||
| Total Derivatives | $ | 302,000 | $ | (23,567) | |||||||||||||||||||||||||||||||
(1) Represents interest rate swaps with commercial banking customers, which are offset by derivatives with a third party.
Accrued interest payable related to interest rate swaps as of December 31, 2020 totaled $0.6 million and is excluded from the fair value presented in the table above. The fair value of interest rate swaps in a net liability position, including accrued interest, totaled $24.2 million as of December 31, 2020.
102
December 31, 2016:2019:
| | | | Notional Amount | | | Original Maturity | | | Received | | | Paid | | | Fair Value Asset (Liability) | | |||||||||
| | | | (Dollars in thousands) | | |||||||||||||||||||||
| Cash flow hedge: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate swap on FHLB advance | | | | $ | 25,000 | | | | 4.7 years | | | 3-month LIBOR | | | | | 1.62% | | | | | $ | (91) | | |
| Interest rate swap on FHLB advance | | | | | 25,000 | | | | 5.0 years | | | 3-month LIBOR | | | | | 1.83% | | | | | | (138) | | |
| Interest rate swap on FHLB advance | | | | | 25,000 | | | | 5.0 years | | | 3-month LIBOR | | | | | 1.48% | | | | | | 249 | | |
| Interest rate swap on FHLB advance | | | | | 25,000 | | | | 5.0 years | | | 3-month LIBOR | | | | | 1.22% | | | | | | 717 | | |
| | | | | $ | 100,000 | | | | | | | | | | | | | | | | | $ | 737 | | |
| | |||||||||||||||||||||||||
| Original Notional Amount | Original Maturity | Maturity Date | Received | Paid | Fair Value Asset (Liability) | ||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments: | |||||||||||||||||||||||||||||||||||
| Interest rate swap | $ | 25,000 | 5.0 years | January 1, 2020 | 3-month USD LIBOR | 1.83 | % | $ | 0 | ||||||||||||||||||||||||||
| Interest rate swap | 25,000 | 5.0 years | August 26, 2020 | 3-month USD LIBOR | 1.48 | % | 51 | ||||||||||||||||||||||||||||
| Interest rate swap | 25,000 | 5.0 years | July 1, 2021 | 3-month USD LIBOR | 1.22 | % | 174 | ||||||||||||||||||||||||||||
| Interest rate swap | 25,000 | 7.0 years | August 25, 2024 | 3-month USD LIBOR | 2.04 | % | (396) | ||||||||||||||||||||||||||||
| Interest rate swap | 25,000 | 7.0 years | August 25, 2024 | 3-month USD LIBOR | 2.04 | % | (402) | ||||||||||||||||||||||||||||
| Interest rate swap | 25,000 | 15.0 years | January 1, 2034 | 3-month USD LIBOR | 3.01 | % | (3,328) | ||||||||||||||||||||||||||||
| Interest rate swap | 25,000 | 3.0 years | December 23, 2022 | 3-month USD LIBOR | 1.28 | % | 279 | ||||||||||||||||||||||||||||
Forward-starting interest rate swap(1) | 25,000 | 15.0 years | January 1, 2035 | 3-month USD LIBOR | 3.03 | % | (3,557) | ||||||||||||||||||||||||||||
Forward-starting interest rate swap(1) | 25,000 | 15.0 years | August 26, 2035 | 3-month USD LIBOR | 3.05 | % | (3,512) | ||||||||||||||||||||||||||||
| $ | 225,000 | $ | (10,691) | ||||||||||||||||||||||||||||||||
Derivatives not designated as hedging instruments:(2) | |||||||||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||||||
| $ | 40,000 | $ | 0 | ||||||||||||||||||||||||||||||||
| Total Derivatives | $ | 265,000 | $ | (10,691) | |||||||||||||||||||||||||||||||
(1) The effective portiondate of unrealized changesthe 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.
Accrued interest receivable related to interest rate swaps as of December 31, 2019 totaled $21.6 thousand and is excluded from the fair value presented in the table above. The fair value of interest rate swaps including accrued interest totaled $10.7 million as of December 31, 2019.
Changes in the fair value of derivatives accounted fordesignated and that qualify as cash flow hedges is reportedrecorded in accumulated other comprehensive income and is subsequently reclassified tointo earnings in the same period or periods during whichthat the hedged forecasted transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. The Company expects to recognize $3.7 million in interest expense related to interest rate swap agreements included in other comprehensive income during the next 12 months.
The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction. The ineffective portion of changes in the fair value of the derivatives is recognized directly in earnings.
The interest rate swap assets are presented in other assets and the interest rate swap liabilities are presented in accrued expenses and other liabilities in the consolidated balance sheets.Consolidated Balance Sheets. The Company does not offset derivative assets and derivative liabilities for financial statement presentation purposes.
103
The Company’sCompany's cash flow hedge positions are all forward startingconsist of interest rate swap transactions. The Company entered intotransactions as detailed in the following forward starting interest rate swap transactions:table below:
| | | | Notional Amount | | | Effective Date of Hedged Borrowing | | | Duration of Borrowing | | | Counterparty | | |||
| | | | (Dollars in thousands) | | ||||||||||||
| Type of borrowing: | | | | | | | | | | | | | | | | |
| FHLB 90-day advance | | | | $ | 25,000 | | | | April 1, 2014 | | | 4.7 years | | | Bank of Montreal | |
| FHLB 90-day advance | | | | | 25,000 | | | | January 2, 2015 | | | 5.0 years | | | Bank of Montreal | |
| FHLB 90-day advance | | | | | 25,000 | | | | August 26, 2015 | | | 5.0 years | | | Bank of Montreal | |
| FHLB 90-day advance | | | | | 25,000 | | | | July 1, 2016 | | | 5.0 years | | | Bank of Montreal | |
| FHLB 90-day advance | | | | | 25,000 | | | | August 25, 2017 | | | 7.0 years | | | Bank of Montreal | |
| FHLB 90-day advance | | | | | 25,000 | | | | August 25, 2017 | | | 7.0 years | | | FTN Financial Capital Markets | |
| | | | | $ | 150,000 | | | | | | | | | | | |
| | ||||||||||||||||
| Notional Amount | Effective Date of Hedging Relationship | Duration of Interest Rate Swap | Counterparty | |||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| $25,000 | July 1, 2016 | 5.0 years | Bank of Montreal | |||||||||||||||||
| 25,000 | August 25, 2017 | 7.0 years | Bank of Montreal | |||||||||||||||||
| 25,000 | August 25, 2017 | 7.0 years | FHN Financial Capital Markets | |||||||||||||||||
| 25,000 | January 2, 2019 | 15.0 years | Bank of Montreal | |||||||||||||||||
| 25,000 | December 27, 2019 | 3.0 years | Bank of Montreal | |||||||||||||||||
| 25,000 | January 2, 2020 | 15.0 years | Bank of Montreal | |||||||||||||||||
| 25,000 | April 15, 2020 | 5.0 years | Goldman Sachs Bank USA | |||||||||||||||||
| 25,000 | April 29, 2020 | 5.0 years | Goldman Sachs Bank USA | |||||||||||||||||
| 25,000 | August 26, 2020 | 15.0 years | FHN Financial Capital Markets | |||||||||||||||||
| $225,000 | ||||||||||||||||||||
This hedge strategy converts the floating rate of interest on short termshort-term rolling FHLB advances or brokered deposits to long-term fixed interest rates, thereby protecting the Company from floating interest rate variability.
Changes in the consolidated statements of comprehensive income (loss) related to interest rate derivatives designated as hedges of cash flows were as follows for the years ended December 31, 20172020, December 31, 2019 and 2016:2018:
| | | | December 31, 2017 | | | December 31, 2016 | | ||||||
| | | | (In thousands) | | |||||||||
| Interest rate swap on FHLB advance: | | | | | | | | | | | | | |
| Unrealized gain recognized in accumulated other comprehensive income | | | | $ | 1,297 | | | | | $ | 1,013 | | |
| Income tax expense on items recognized in accumulated other comprehensive income | | | | | (454) | | | | | | (354) | | |
| Other comprehensive income | | | | $ | 843 | | | | | $ | 659 | | |
| Amount recognized in interest expense on hedged FHLB advance | | | | $ | 1,909 | | | | | $ | 1,386 | | |
| | |||||||||||||
| December 31, 2020 | December 31, 2019 | December 31, 2018 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Interest rate swaps designated as cash flow hedges: | |||||||||||||||||
| Unrealized loss recognized in accumulated other comprehensive (loss) income before reclassifications | $ | (14,970) | $ | (10,361) | $ | (914) | |||||||||||
| Amounts reclassified from accumulated other comprehensive income | 2,094 | (760) | (690) | ||||||||||||||
| Income tax benefit on items recognized in accumulated other comprehensive (loss) income | 3,001 | 2,335 | 337 | ||||||||||||||
| Other comprehensive loss | $ | (9,875) | $ | (8,786) | $ | (1,267) | |||||||||||
The above unrealized gains and losses are reflective of market interest rates as of the respective balance sheet dates. Generally, a lower interest rate environment will result in a negative impact to comprehensive income whereas a higher interest rate environment will result in a positive impact to comprehensive income.
The following tables summarize gross and net information about derivative instruments that are offset in the Consolidated Balance Sheets at December 31, 2020 and December 31, 2019:
| December 31, 2020 | |||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||
| Gross Amounts Not Offset in the Consolidated Balance Sheets | |||||||||||||||||||||||||||||||||||
| Gross Amounts of Recognized Assets(1) | Gross Amounts Offset in the Statement of Financial Position | Net Amounts of Assets presented in the Statement of Financial Position | Financial Instruments | Cash Collateral Received | Net Amount | ||||||||||||||||||||||||||||||
| Derivative Assets | $ | 4,484 | $ | 0 | $ | 4,484 | $ | 0 | $ | 0 | $ | 4,484 | |||||||||||||||||||||||
(1) Includes accrued interest receivable totaling $40.0 thousand.
104
| December 31, 2020 | |||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||
| Gross Amounts Not Offset in the Consolidated Balance Sheets | |||||||||||||||||||||||||||||||||||
| Gross Amounts of Recognized Liabilities(1) | Gross Amounts Offset in the Statement of Financial Position | Net Amounts of Liabilities presented in the Statement of Financial Position | Financial Instruments | Cash Collateral Posted(2) | Net Amount | ||||||||||||||||||||||||||||||
| Derivative Liabilities | $ | 28,673 | $ | 0 | $ | 28,673 | $ | 0 | $ | 28,205 | $ | 468 | |||||||||||||||||||||||
(1) Includes accrued interest payable totaling $662.0 thousand.
| December 31, 2019 | |||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||
| Gross Amounts Not Offset in the Consolidated Balance Sheets | |||||||||||||||||||||||||||||||||||
| Gross Amounts of Recognized Assets(1) | Gross Amounts Offset in the Statement of Financial Position | Net Amounts of Assets presented in the Statement of Financial Position | Financial Instruments | Cash Collateral Received | Net Amount | ||||||||||||||||||||||||||||||
| Derivative Assets | $ | 2,363 | $ | 0 | $ | 2,363 | $ | 591 | $ | 0 | $ | 1,772 | |||||||||||||||||||||||
(1) Includes accrued interest receivable totaling $97.1 thousand
| December 31, 2019 | |||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||
| Gross Amounts Not Offset in the Consolidated Balance Sheets | |||||||||||||||||||||||||||||||||||
| Gross Amounts of Recognized Assets | Gross Amounts Offset in the Statement of Financial Position | Net Amounts of Assets presented in the Statement of Financial Position | Financial Instruments | Cash Collateral Received | Net Amount | ||||||||||||||||||||||||||||||
| Derivative Liabilities | $ | 13,032 | $ | 0 | $ | 13,032 | $ | 591 | $ | 12,441 | $ | 0 | |||||||||||||||||||||||
(1) Includes accrued interest payable totaling $75.5 thousand.
(2) Actual cash collateral posted totaled $13.5 million, total cash collateral posted in the above table represents the total value to net the derivative liabilities to $0.
19.
Fair Value of Financial Instruments
GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the statements of condition,Consolidated Balance Sheets, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparisons to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction. The estimated fair value amounts have been measured as of the respective period-ends, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end.
The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk.
The carrying values, fair values and placement in the fair value hierarchy of the Company’s financial instruments at December 31, 20172020 and 2016December 31, 2019 were as follows:
| | | December 31, 2017 | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | Carrying Value | | Fair Value | | Level 1 | | Level 2 | | Level 3 | | |||||||||||||||||||||||||||||||||||||||||||||||||
| | | (In thousands) | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Financial Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Carrying Value | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Financial assets: | Financial assets: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash and due from banks | | | $ | 70,545 | | | | $ | 70,545 | | | | $ | 70,545 | | | | $ | — | | | | $ | — | | Cash and due from banks | $ | 405,340 | $ | 405,340 | $ | 405,340 | $ | 0 | $ | 0 | ||||||||||||||||||||||||
| Federal funds sold | | | | 186 | | | | | 186 | | | | | 186 | | | | | — | | | | | — | | Federal funds sold | 4,258 | 4,258 | 4,258 | 0 | 0 | |||||||||||||||||||||||||||||
| Marketable equity securities | Marketable equity securities | 2,207 | 2,207 | 2,207 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Available for sale securities | | | | 92,188 | | | | | 92,188 | | | | | — | | | | | 92,188 | | | | | — | | Available for sale securities | 88,605 | 88,605 | 10,148 | 78,457 | 0 | |||||||||||||||||||||||||||||
| Held to maturity securities | | | | 21,579 | | | | | 22,836 | | | | | — | | | | | 1,119 | | | | | 21,717 | | Held to maturity securities | 16,078 | 20,032 | 0 | 70 | 19,962 | |||||||||||||||||||||||||||||
| Loans receivable, net | | | | 1,520,879 | | | | | 1,494,599 | | | | | — | | | | | — | | | | | 1,494,599 | | Loans receivable, net | 1,601,672 | 1,605,402 | 0 | 0 | 1,605,402 | |||||||||||||||||||||||||||||
| Accrued interest receivable | | | | 5,910 | | | | | 5,910 | | | | | — | | | | | 5,910 | | | | | — | | Accrued interest receivable | 6,579 | 6,579 | 0 | 6,579 | 0 | |||||||||||||||||||||||||||||
| FHLB stock | | | | 9,183 | | | | | 9,183 | | | | | — | | | | | 9,183 | | | | | — | | FHLB stock | 7,860 | 7,860 | 0 | 7,860 | 0 | |||||||||||||||||||||||||||||
| Servicing asset | | | | 1,113 | | | | | 1,113 | | | | | — | | | | | — | | | | | 1,113 | | |||||||||||||||||||||||||||||||||||
| Servicing asset, net of valuation allowance | Servicing asset, net of valuation allowance | 628 | 628 | 0 | 0 | 628 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivative asset | | | | 2,034 | | | | | 2,034 | | | | | — | | | | | 2,034 | | | | | — | | Derivative asset | 4,444 | 4,444 | 0 | 4,444 | 0 | |||||||||||||||||||||||||||||
| Financial Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||||||||||
| Demand deposits | | | $ | 172,638 | | | | $ | 172,638 | | | | $ | — | | | | $ | 172,638 | | | | $ | — | | |||||||||||||||||||||||||||||||||||
| Assets held for sale | Assets held for sale | 2,613 | 2,613 | 0 | 0 | 2,613 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Financial liabilities: | Financial liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noninterest bearing deposits | Noninterest bearing deposits | $ | 270,235 | $ | 270,235 | $ | 0 | $ | 270,235 | $ | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||
| NOW and money market | | | | 510,746 | | | | | 510,746 | | | | | — | | | | | 510,746 | | | | | — | | NOW and money market | 771,101 | 771,101 | 0 | 771,101 | 0 | |||||||||||||||||||||||||||||
| Savings | | | | 83,758 | | | | | 83,758 | | | | | — | | | | | 83,758 | | | | | — | | Savings | 158,750 | 158,750 | 0 | 158,750 | 0 | |||||||||||||||||||||||||||||
| Time deposits | | | | 631,263 | | | | | 629,532 | | | | | — | | | | | — | | | | | 629,532 | | Time deposits | 627,230 | 631,891 | 0 | 0 | 631,891 | |||||||||||||||||||||||||||||
| Accrued interest payable | | | | 1,092 | | | | | 1,092 | | | | | — | | | | | 1,092 | | | | | — | | Accrued interest payable | 1,750 | 1,750 | 0 | 1,750 | 0 | |||||||||||||||||||||||||||||
| Advances from the FHLB | | | | 199,000 | | | | | 198,932 | | | | | — | | | | | — | | | | | 198,932 | | Advances from the FHLB | 175,000 | 174,997 | 0 | 0 | 174,997 | |||||||||||||||||||||||||||||
| Subordinated debentures | | | | 25,103 | | | | | 25,457 | | | | | — | | | | | — | | | | | 25,457 | | Subordinated debentures | 25,258 | 25,447 | 0 | 0 | 25,447 | |||||||||||||||||||||||||||||
| Servicing liability | | | | 83 | | | | | 83 | | | | | — | | | | | — | | | | | 83 | | Servicing liability | 21 | 21 | 0 | 0 | 21 | |||||||||||||||||||||||||||||
| Derivative liability | Derivative liability | 28,011 | 28,011 | 0 | 28,011 | 0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
106
| December 31, 2019 | |||||||||||||||||||||||||||||
| Carrying Value | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||||||||
| Cash and due from banks | $ | 78,051 | $ | 78,051 | $ | 78,051 | $ | 0 | $ | 0 | |||||||||||||||||||
| Marketable equity securities | 2,118 | 2,118 | 2,118 | 0 | 0 | ||||||||||||||||||||||||
| Available for sale securities | 82,439 | 82,439 | 10,031 | 72,408 | 0 | ||||||||||||||||||||||||
| Held to maturity securities | 16,308 | 18,307 | 0 | 85 | 18,222 | ||||||||||||||||||||||||
| Loans receivable, net | 1,588,840 | 1,589,732 | 0 | 0 | 1,589,732 | ||||||||||||||||||||||||
| Accrued interest receivable | 5,959 | 5,959 | 0 | 5,959 | 0 | ||||||||||||||||||||||||
| FHLB stock | 7,475 | 7,475 | 0 | 7,475 | 0 | ||||||||||||||||||||||||
| Servicing asset, net of valuation allowance | 978 | 978 | 0 | 0 | 978 | ||||||||||||||||||||||||
| Derivative asset | 2,266 | 2,266 | 0 | 2,266 | 0 | ||||||||||||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||||||||
| Noninterest bearing deposits | $ | 191,518 | $ | 191,518 | $ | 0 | $ | 191,518 | $ | 0 | |||||||||||||||||||
| NOW and money market | 489,515 | 489,515 | 0 | 489,515 | 0 | ||||||||||||||||||||||||
| Savings | 183,729 | 183,729 | 0 | 183,729 | 0 | ||||||||||||||||||||||||
| Time deposits | 627,141 | 632,436 | 0 | 0 | 632,436 | ||||||||||||||||||||||||
| Accrued interest payable | 2,142 | 2,142 | 0 | 2,142 | 0 | ||||||||||||||||||||||||
| Advances from the FHLB | 150,000 | 150,006 | 0 | 0 | 150,006 | ||||||||||||||||||||||||
| Subordinated debentures | 25,207 | 25,530 | 0 | 0 | 25,530 | ||||||||||||||||||||||||
| Servicing liability | 63 | 63 | 0 | 0 | 63 | ||||||||||||||||||||||||
| Derivative liability | 12,957 | 12,957 | 0 | 12,957 | 0 | ||||||||||||||||||||||||
| | | | December 31, 2016 | | |||||||||||||||||||||||||||
| | | | Carrying Value | | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | | |||||||||||||||
| | | | (In thousands) | | |||||||||||||||||||||||||||
| Financial Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and due from banks | | | | $ | 96,026 | | | | | $ | 96,026 | | | | | $ | 96,026 | | | | | $ | — | | | | | $ | — | | |
| Federal funds sold | | | | | 329 | | | | | | 329 | | | | | | 329 | | | | | | — | | | | | | — | | |
| Available for sale securities | | | | | 87,751 | | | | | | 87,751 | | | | | | — | | | | | | 87,751 | | | | | | — | | |
| Held to maturity securities | | | | | 16,859 | | | | | | 16,851 | | | | | | — | | | | | | 1,141 | | | | | | 15,710 | | |
| Loans held for sale | | | | | 254 | | | | | | 254 | | | | | | — | | | | | | 254 | | | | | | — | | |
| Loans receivable, net | | | | | 1,343,895 | | | | | | 1,339,055 | | | | | | — | | | | | | — | | | | | | 1,339,055 | | |
| Accrued interest receivable | | | | | 4,958 | | | | | | 4,958 | | | | | | — | | | | | | 4,958 | | | | | | — | | |
| FHLB stock | | | | | 7,943 | | | | | | 7,943 | | | | | | — | | | | | | 7,943 | | | | | | — | | |
| Derivative asset | | | | | 966 | | | | | | 966 | | | | | | — | | | | | | 966 | | | | | | — | | |
| Financial Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Demand deposits | | | | $ | 187,593 | | | | | $ | 187,593 | | | | | $ | — | | | | | $ | 187,593 | | | | | $ | — | | |
| NOW and money market | | | | | 402,982 | | | | | | 402,982 | | | | | | — | | | | | $ | 402,982 | | | | | | — | | |
| Savings | | | | | 96,601 | | | | | | 96,601 | | | | | | — | | | | | $ | 96,601 | | | | | | — | | |
| Time deposits | | | | | 601,861 | | | | | | 603,456 | | | | | | — | | | | | | — | | | | | | 603,456 | | |
| Accrued interest payable | | | | | 837 | | | | | | 837 | | | | | | — | | | | | | 837 | | | | | | — | | |
| Advances from the FHLB | | | | | 160,000 | | | | | | 160,118 | | | | | | — | | | | | | — | | | | | | 160,118 | | |
| Subordinated debentures | | | | | 25,051 | | | | | | 25,645 | | | | | | — | | | | | | — | | | | | | 25,645 | | |
| Derivative liability | | | | | 229 | | | | | | 229 | | | | | | — | | | | | | 229 | | | | | | — | | |
The following methods and assumptions were used by management in estimating the fair value of its financial instruments:
Cash and due from banks, federal funds sold, accrued interest receivable and accrued interest payable: The carrying amount is a reasonable estimate of fair value.
FHLB stock: The carrying value of FHLB stock approximates fair value based on the most recent redemption provisions of the FHLB.
Loans held for sale: The fair value is based upon prevailing market prices for similar loans.
Derivative asset (liability):The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The BankCompany also considers the creditworthiness of theeach counterparty for assets and the creditworthiness of the BankCompany for liabilities.
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Assets held for sale: Assets held for sale (excluding loans) consist of real estate properties that are expected to sell within a year. The assets are reported at the lower of the carrying amount or fair value less costs to sell. The fair value represents the price that would be received to sell the asset (the exit price).
Servicing Assetasset (liability): Servicing assets and liabilities do not trade in an active, open market with readily observable prices. The Company estimates the fair value of servicing assets and liabilities using discounted cash flow models, incorporating numerous assumptions from the perspective of a market participant, including market discount rates.
Deposits: The fair value of demand deposits, regular savings and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit and other time deposits is estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities to a schedule of aggregated expected maturities on such deposits.
Borrowings and Subordinated Debentures: subordinated debentures: The fair value of the Company’s borrowings and subordinated debentures is estimated using a discounted cash flow calculation that applies discount rates currently offered based on similar maturities. The BankCompany also considers its own creditworthiness in determining the fair value of its borrowings and subordinated debt. Contractual cash flows for the subordinated debt are reduced based on the estimated rates of default, the severity of losses to be incurred on a default, and the rates at which the subordinated debt is expected to prepay after the call date.
Off-balance-sheet instruments: Loan commitments on which the committed interest rate is less than the current market rate are insignificant at December 31, 20172020 and 2016.December 31, 2019.
20.
Fair Value Measurements
The Company is required to account for certain assets at fair value on a recurring or non-recurring basis. As discussed in Note 1, the Company determines fair value in accordance with GAAP, which defines fair value and establishes a framework for measuring fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:
Level 1—
1 — Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 —
Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 —
Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Valuation techniques based on unobservable inputs are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows and the selection of discount rates that may appropriately reflect market and credit risks. Changes in these judgments often have a material impact on the fair value estimates. In addition, since these estimates are as of a specific point in time they are susceptible to material near-term changes.
The following tables detailtable details the financial instruments carried at fair value on a recurring basis at December 31, 20172020 and 2016,December 31, 2019, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value. The Company had no transfers into or out of Levels 1, 2 or 3 during the years ended December 31, 20172020 and 2016.December 31, 2019.
| | | | Fair Value | | |||||||||||||||
| | | | Level 1 | | | Level 2 | | | Level 3 | | |||||||||
| | | | (In thousands) | | |||||||||||||||
| December 31, 2017: | | | | | | | | | | | | | | | | | | | |
| Available for sale investment securities: | | | | | | | | | | | | | | | | | | | |
| U.S. Government and agency obligations | | | | $ | — | | | | | $ | 72,774 | | | | | $ | — | | |
| State agency and municipal obligations | | | | | — | | | | | | 12,277 | | | | | | — | | |
| Corporate bonds | | | | | — | | | | | | 7,137 | | | | | | — | | |
| Derivative asset, net | | | | | — | | | | | | 2,034 | | | | | | — | | |
| December 31, 2016: | | | | | | | | | | | | | | | | | | | |
| Available for sale investment securities: | | | | | | | | | | | | | | | | | | | |
| U.S. Government and agency obligations | | | | $ | — | | | | | $ | 62,698 | | | | | $ | — | | |
| State agency and municipal obligations | | | | | — | | | | | | 14,763 | | | | | | — | | |
| Corporate bonds | | | | | — | | | | | | 10,290 | | | | | | — | | |
| Derivative asset, net | | | | | — | | | | | | 737 | | | | | | — | | |
108
| Fair Value | |||||||||||||||||
| Level 1 | Level 2 | Level 3 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| December 31, 2020 | |||||||||||||||||
| Marketable equity securities | $ | 2,207 | $ | 0 | $ | 0 | |||||||||||
| Available for sale investment securities: | |||||||||||||||||
| U.S. Government and agency obligations | 10,148 | 66,730 | 0 | ||||||||||||||
| Corporate bonds | 0 | 11,727 | 0 | ||||||||||||||
| Derivative asset | 0 | 4,444 | 0 | ||||||||||||||
| Derivative liability | 0 | 28,011 | 0 | ||||||||||||||
| December 31, 2019 | |||||||||||||||||
| Marketable equity securities | $ | 2,118 | $ | 0 | $ | 0 | |||||||||||
| Available for sale investment securities: | |||||||||||||||||
| U.S. Government and agency obligations | 10,031 | 72,408 | 0 | ||||||||||||||
| Derivative asset | 0 | 2,266 | 0 | ||||||||||||||
| Derivative liability | 0 | 12,957 | 0 | ||||||||||||||
Marketable equity securities and available for sale investment securities: The fair value of the Company’s investment securities areis estimated by using pricing models or quoted prices of securities with similar characteristics (i.e. matrix pricing) and areis classified within Level 1 or Level 2 of the valuation hierarchy. The pricing is primarily sourced from third party pricing services, overseen by management.
Derivative Assetsassets and liabilities: The Company’s derivative assets and liabilities consist of transactions as part of management’s strategy to manage interest rate risk. The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company also considers the creditworthiness of each counterparty for assets and the creditworthiness of the Company for liabilities. The Company has determined that the majority of the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy.
Financial instruments measured at fair value on a nonrecurring basis
Certain assets and liabilities are measured at fair value on a non-recurring basis in accordance with GAAP. These include assets that are measured at the-lower-of-cost-or market that were recognized at fair value below cost at the end of the period as well as assets that are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.
The following table details the financial instruments carriedmeasured at fair value on a nonrecurring basis at December 31, 20172020 and 2016,December 31, 2019, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:
| | | | Fair Value | | |||||||||||||||
| | | | Level 1 | | | Level 2 | | | Level 3 | | |||||||||
| | | | (In thousands) | | |||||||||||||||
| December 31, 2017: | | | | | | | | | | | | | | | | | | | |
| Impaired loans | | | | $ | — | | | | | $ | — | | | | | $ | 14,853 | | |
| Foreclosed real estate | | | | | — | | | | | | — | | | | | | — | | |
| December 31, 2016: | | | | | | | | | | | | | | | | | | | |
| Impaired loans | | | | $ | — | | | | | $ | — | | | | | $ | 4,849 | | |
| Foreclosed real estate | | | | | — | | | | | | — | | | | | | 272 | | |
| Fair Value | |||||||||||||||||
| Level 1 | Level 2 | Level 3 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| December 31, 2020 | |||||||||||||||||
| Impaired loans | $ | 0 | $ | 0 | $ | 42,661 | |||||||||||
| Servicing asset, net | 0 | 0 | 607 | ||||||||||||||
| Assets held for sale | 0 | 0 | 2,613 | ||||||||||||||
| December 31, 2019 | |||||||||||||||||
| Impaired loans | $ | 0 | $ | 0 | $ | 22,047 | |||||||||||
| Servicing asset, net | 0 | 0 | 915 | ||||||||||||||
109
The following table presents information about quantitative inputs and assumptions for Level 3 financial instruments carried at fair value on a nonrecurring basis at December 31, 20172020 and 2016:December 31, 2019:
| | | | Fair Value | | | Valuation Methodology | | | Unobservable Input | | | Range | | |||
| | | | (Dollars in thousands) | | ||||||||||||
| December 31, 2017: | | | | | | | | | | | | | | | | |
| Impaired loans | | | | $ | 7,711 | | | | Appraisals | | | Discount to appraised value | | | 8.00 – 24.00% | |
| | | | | | 7,142 | | | | Discounted cash flows | | | Discount rate | | | 3.25 – 6.75% | |
| | | | | $ | 14,853 | | | | | | | | | | | |
| Foreclosed real estate | | | | $ | — | | | | Appraisals | | | Discount to appraised value | | | — | |
| December 31, 2016: | | | | | | | | | | | | | | | | |
| Impaired loans | | | | $ | 2,127 | | | | Appraisals | | | Discount to appraised value | | | 8.00 – 28.00% | |
| | | | | | 2,722 | | | | Discounted cash flows | | | Discount rate | | | 4.25 – 6.25% | |
| | | | | $ | 4,849 | | | | | | | | | | | |
| Foreclosed real estate | | | | $ | 272 | | | | Appraisals | | | Discount to appraised value | | | 20% | |
| Fair Value | Valuation Methodology | Unobservable Input | Range | |||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||
| Impaired loans | $ | 20,703 | Appraisals | Discount to appraised value | 8.00–33.00% | |||||||||||||||||||||
| 21,958 | Discounted cash flows | Discount rate | 3.00–12.00% | |||||||||||||||||||||||
| $ | 42,661 | |||||||||||||||||||||||||
| Servicing asset, net | $ | 607 | Discounted cash flows | Discount rate | 10.00% | (1) | ||||||||||||||||||||
| Prepayment rate | 3.00-16.00% | |||||||||||||||||||||||||
| Assets held for sale | $ | 2,613 | Sale & Income Approach | Adjustment to valuation and cost to sell | N/A | |||||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||
| Impaired loans | $ | 12,300 | Appraisals | Discount to appraised value | 8.00–28.00% | |||||||||||||||||||||
| 9,747 | Discounted cash flows | Discount rate | 3.60–7.00% | |||||||||||||||||||||||
| $ | 22,047 | |||||||||||||||||||||||||
| Servicing asset, net | $ | 915 | Discounted cash flows | Discount rate | 10.00-11.00% | (2) | ||||||||||||||||||||
| Prepayment rate | 3.00-19.00% | |||||||||||||||||||||||||
(1) Servicing liabilities totaling $21 thousand were valued using a discount rate of 0.2%.
(2) Servicing liabilities totaling $63 thousand were valued using a discount rate of 1.6%.
Impaired loans: Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral-dependent loans calculated in accordance with ASC 310-10 when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. Collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or other assumptions. Estimates of fair value based on collateral are generally based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3. For those loans where the primary source of repayment is cash flow from operations, adjustments include impairment amounts calculated based on the perceived collectability of interest payments on the basis of a discounted cash flow analysis utilizing a discount rate equivalent to the original note rate.
Assets held for sale: Assets held for sale (excluding loans) consist of real estate properties that are expected to sell within a year. The
110
21.
Regulatory Matters
The Federal Reserve, the FDIC and the other federal and state bank regulatory agencies establish regulatory capital guidelines for U.S. banking organizations.
As of January 1, 2015, the Company and the Bank became subject to new capital rules set forth by the Federal Reserve, the FDIC and the other federal and state bank regulatory agencies. The capital rules revise the banking agencies’ leverage and risk-based capital requirements and the method for calculating risk weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act (the Basel III Capital Rules).
The Basel III Capital Rules establish a minimum common equityCommon Equity Tier 1 capital requirement of 4.5% of risk-weighted assets; set the minimum leverage ratio at 4%4.0% of total assets; increased the minimum Tier 1 capital to risk-weighted assets requirement from 4%4.0% to 6%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 100-200100 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 excludeexcludes 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” consisting of 2.5% of regulatory risk based capital ratios in addition to the amount necessary to meet its minimum risk-basedrisk based capital requirements.requirement. The required minimum“capital conservation buffer began to bebuffer” was phased in incrementally, starting at 0.625% onfrom January 1, 2016 increased to 1.25% on January 1, 2017, increased to 1.875% on January 1, 2018 and will continue to increase to 2.5% on January 1, 2019.2019, 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.
The capital amounts and ratios for the Bank and the Company at December 31, 20172020 were as follows:
| | | Actual Capital | | For Capital Adequacy Purposes | | To be Well Capitalized Under Prompt Corrective Action Provisions | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | (Dollars in thousands) | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Actual Capital | Minimum Regulatory Capital Required for Capital Adequacy plus Capital Conservation Buffer | Minimum Regulatory Capital to be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Bankwell Bank | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Bankwell Bank | |||||||||||||||||||||||||||||||||||||||||
| December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||||||||||||||||
| December 31, 2020 | December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Equity Tier 1 Capital to Risk-Weighted Assets | | | $ | 173,728 | | | | | 10.99% | | | | $ | 71,106 | | | | | 4.50% | | | | $ | 102,709 | | | | | 6.50% | | Common Equity Tier 1 Capital to Risk-Weighted Assets | $ | 191,579 | 11.06 | % | $ | 121,216 | 7.00 | % | $ | 112,558 | 6.50 | % | |||||||||||||||||||||||||||||
| Total Capital to Risk-Weighted Assets | | | | 192,632 | | | | | 12.19% | | | | | 126,411 | | | | | 8.00% | | | | | 158,014 | | | | | 10.00% | | Total Capital to Risk-Weighted Assets | 212,588 | 12.28 | % | 181,825 | 10.50 | % | 173,166 | 10.00 | % | ||||||||||||||||||||||||||||||||
| Tier I Capital to Risk-Weighted Assets | | | | 173,728 | | | | | 10.99% | | | | | 94,808 | | | | | 6.00% | | | | | 126,411 | | | | | 8.00% | | Tier I Capital to Risk-Weighted Assets | 191,579 | 11.06 | % | 147,191 | 8.50 | % | 138,533 | 8.00 | % | ||||||||||||||||||||||||||||||||
| Tier I Capital to Average Assets | | | | 173,728 | | | | | 9.61% | | | | | 72,349 | | | | | 4.00% | | | | | 90,437 | | | | | 5.00% | | Tier I Capital to Average Assets | 191,579 | 8.44 | % | 90,836 | 4.00 | % | 113,545 | 5.00 | % | ||||||||||||||||||||||||||||||||
| Bankwell Financial Group, Inc. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Bankwell Financial Group, Inc. | |||||||||||||||||||||||||||||||||||||||||
| December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||||||||||||||||
| December 31, 2020 | December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Equity Tier 1 Capital to Risk-Weighted Assets | | | $ | 155,977 | | | | | 9.83% | | | | $ | 71,369 | | | | | 4.50% | | | | | N/A | | | | | N/A | | Common Equity Tier 1 Capital to Risk-Weighted Assets | 189,529 | 10.93 | % | 121,408 | 7.00 | % | N/A | N/A | |||||||||||||||||||||||||||||||||
| Total Capital to Risk-Weighted Assets | | | | 199,984 | | | | | 12.61% | | | | | 126,878 | | | | | 8.00% | | | | | N/A | | | | | N/A | | Total Capital to Risk-Weighted Assets | 230,696 | 13.30 | % | 182,111 | 10.50 | % | N/A | N/A | |||||||||||||||||||||||||||||||||
| Tier I Capital to Risk-Weighted Assets | | | | 155,977 | | | | | 9.83% | | | | | 95,159 | | | | | 6.00% | | | | | N/A | | | | | N/A | | Tier I Capital to Risk-Weighted Assets | 189,529 | 10.93 | % | 147,423 | 8.50 | % | N/A | N/A | |||||||||||||||||||||||||||||||||
| Tier I Capital to Average Assets | | | | 155,977 | | | | | 8.59% | | | | | 72,663 | | | | | 4.00% | | | | | N/A | | | | | N/A | | Tier I Capital to Average Assets | 189,529 | 8.34 | % | 90,916 | 4.00 | % | N/A | N/A | |||||||||||||||||||||||||||||||||
111
The capital amounts and ratios for the Bank and Company at December 31, 2016,2019 were as follows:
| | | | Actual Capital | | | For Capital Adequacy Purposes | | | To be Well Capitalized Under Prompt Corrective Action Provisions | | |||||||||||||||||||||||||||
| | | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | ||||||||||||||||||
| | | | (Dollars in thousands) | | |||||||||||||||||||||||||||||||||
| Bankwell Bank | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Equity Tier 1 Capital to Risk-Weighted Assets | | | | $ | 157,604 | | | | | | 11.59% | | | | | $ | 61,168 | | | | | | 4.50% | | | | | $ | 88,353 | | | | | | 6.50% | | |
| Total Capital to Risk-Weighted Assets | | | | | 174,610 | | | | | | 12.85% | | | | | | 108,742 | | | | | | 8.00% | | | | | | 135,928 | | | | | | 10.00% | | |
| Tier I Capital to Risk-Weighted Assets | | | | | 157,604 | | | | | | 11.59% | | | | | | 81,557 | | | | | | 6.00% | | | | | | 108,742 | | | | | | 8.00% | | |
| Tier I Capital to Average Assets | | | | | 157,604 | | | | | | 10.10% | | | | | | 62,428 | | | | | | 4.00% | | | | | | 78,035 | | | | | | 5.00% | | |
| Bankwell Financial Group, Inc. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Equity Tier 1 Capital to Risk-Weighted Assets | | | | $ | 141,338 | | | | | | 10.39% | | | | | $ | 61,231 | | | | | | 4.50% | | | | | | N/A | | | | | | N/A | | |
| Total Capital to Risk-Weighted Assets | | | | | 184,371 | | | | | | 13.55% | | | | | | 108,855 | | | | | | 8.00% | | | | | | N/A | | | | | | N/A | | |
| Tier I Capital to Risk-Weighted Assets | | | | | 141,338 | | | | | | 10.39% | | | | | | 81,641 | | | | | | 6.00% | | | | | | N/A | | | | | | N/A | | |
| Tier I Capital to Average Assets | | | | | 141,338 | | | | | | 9.06% | | | | | | 62,415 | | | | | | 4.00% | | | | | | N/A | | | | | | N/A | | |
| Actual Capital | Minimum Regulatory Capital Required for Capital Adequacy plus Capital Conservation Buffer | Minimum Regulatory Capital to be Well Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Bankwell Bank | |||||||||||||||||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||||||||
| Common Equity Tier 1 Capital to Risk-Weighted Assets | $ | 205,856 | 12.53 | % | $ | 115,040 | 7.00 | % | $ | 106,823 | 6.50 | % | |||||||||||||||||||||||
| Total Capital to Risk-Weighted Assets | 219,365 | 13.35 | % | 172,560 | 10.50 | % | 164,343 | 10.00 | % | ||||||||||||||||||||||||||
| Tier I Capital to Risk-Weighted Assets | 205,856 | 12.53 | % | 139,691 | 8.50 | % | 131,474 | 8.00 | % | ||||||||||||||||||||||||||
| Tier I Capital to Average Assets | 205,856 | 10.99 | % | 74,951 | 4.00 | % | 93,689 | 5.00 | % | ||||||||||||||||||||||||||
| Bankwell Financial Group, Inc. | |||||||||||||||||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||||||||
| Common Equity Tier 1 Capital to Risk-Weighted Assets | 187,155 | 11.37 | % | 115,253 | 7.00 | % | N/A | N/A | |||||||||||||||||||||||||||
| Total Capital to Risk-Weighted Assets | 225,871 | 13.72 | % | 172,880 | 10.50 | % | N/A | N/A | |||||||||||||||||||||||||||
| Tier I Capital to Risk-Weighted Assets | 187,155 | 11.37 | % | 139,950 | 8.50 | % | N/A | N/A | |||||||||||||||||||||||||||
| Tier I Capital to Average Assets | 187,155 | 9.97 | % | 75,067 | 4.00 | % | N/A | N/A | |||||||||||||||||||||||||||
Regulatory Restrictionsrestrictions on dividends
The ability of the Company to pay dividends depends, in part, on the ability of the Bank to pay dividends to the Company. In accordance with Connecticut statutes, regulatory approval is required to pay dividends in excess of the Bank’s profits retained in the current year plus retained profits from the previous two years. The Bank is also prohibited from paying dividends that would reduce its capital ratios below minimum regulatory requirements.
Reserve requirements on cash
The Bank was not required to maintain a minimum reserve balance in the Federal Reserve Bank (FRB) at December 31, 2020 as the FRB has waived this requirement due to the COVID-19 pandemic. The Bank was required to maintain a minimum reserve balance of $14.1 million in the Federal Reserve Bank at December 31, 2019. This balance is maintained for clearing purposes in the ordinary course of business and does not represent restricted cash.
22. Related Party Transactions
In the normal course of business, the Company may grant loans to executive officers, directors and members of their immediate families, as defined, and to entities in which these individuals have more than a 10% equity ownership. Such loans are transacted at terms including interest rates, similar to those available to unrelated customers. Changes in loans outstanding to such related parties during the years ending December 31, 20172020 and 2016December 31, 2019 were as follows:
| | | | December 31, | | |||||||||
| | | | 2017 | | | 2016 | | ||||||
| | | | (In thousands) | | |||||||||
| Balance, beginning of year | | | | $ | 22,471 | | | | | $ | 12,891 | | |
| Additional loans | | | | | 3,082 | | | | | | 9,722 | | |
| Repayments and changes in status | | | | | (4,832) | | | | | | (142) | | |
| Balance, end of year | | | | $ | 20,721 | | | | | $ | 22,471 | | |
| | |||||||||||||
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| (In thousands) | |||||||||||
| Balance, beginning of year | $ | 66 | $ | 8,673 | |||||||
| Additional loans | 30,529 | 0 | |||||||||
| Repayments | (3) | (3,573) | |||||||||
| Effect of changes in related parties | 0 | (5,034) | |||||||||
| Balance, end of year | $ | 30,592 | $ | 66 | |||||||
Related party deposits aggregated approximately $45.4$17.4 million and $40.4$45.9 million at December 31, 20172020 and 2016,December 31, 2019, respectively.
During the years ended December 31, 20172020 and 2016,December 31, 2019, the Company paid approximately $133$16 thousand and $28$26 thousand, respectively, to related parties for services provided to the Company. The payments were primarily for consulting and legal services. In addition,
112
As of December 31, 2020, the Company leasesBank had a building from$0.2 million investment in a SBIC. This SBIC represents a related party annual lease payments total approximately $534 thousand.business entity associated with one of the Company's Directors. Contributions to this fund represent an equity investment for the Company.
23.
Parent CorporationCompany Only Financial Statements
Condensed financial statements of the Parent Company only are as follows:
Condensed Statements of Financial Condition
| | | December 31, | | |||||||||||||||||||||
| | | 2017 | | 2016 | | |||||||||||||||||||
| | | (Dollars in Thousands) | | |||||||||||||||||||||
| At December 31, | ||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||
| ASSETS | | | | | | | | | | | | ASSETS | ||||||||||||
| Cash and due from banks | | | $ | 2,494 | | | | $ | 5,677 | | | Cash and due from banks | $ | 22,780 | $ | 6,418 | ||||||||
| Investment in subsidiary | | | | 178,778 | | | | | 162,162 | | | Investment in subsidiary | 178,651 | 201,097 | ||||||||||
| Premises and equipment, net | | | | 17 | | | | | 55 | | | Premises and equipment, net | 3 | 7 | ||||||||||
| Deferred income taxes, net | | | | 53 | | | | | 3,063 | | | Deferred income taxes, net | 205 | 187 | ||||||||||
| Other assets | | | | 9,068 | | | | | 3,889 | | | Other assets | 2,525 | 2,853 | ||||||||||
| Total assets | | | $ | 190,410 | | | | $ | 174,846 | | | Total assets | $ | 204,164 | $ | 210,562 | ||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||
| Subordinated debentures | | | $ | 25,103 | | | | $ | 25,051 | | | Subordinated debentures | $ | 25,258 | $ | 25,207 | ||||||||
| Accrued expenses and other liabilities | | | | 4,280 | | | | | 3,900 | | | Accrued expenses and other liabilities | 2,304 | 2,958 | ||||||||||
| Stockholders’ equity | | | | 161,027 | | | | | 145,895 | | | |||||||||||||
| Total liabilities and stockholders’ equity | | | $ | 190,410 | | | | $ | 174,846 | | | |||||||||||||
| | ||||||||||||||||||||||||
| Shareholders’ equity | Shareholders’ equity | 176,602 | 182,397 | |||||||||||||||||||||
| Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | $ | 204,164 | $ | 210,562 | |||||||||||||||||||
Condensed Statements of Income
| | | | Year Ended December 31, | | |||||||||||||||
| | | | 2017 | | | 2016 | | | 2015 | | |||||||||
| | | | (Dollars in Thousands) | | |||||||||||||||
| Interest income | | | | $ | 13 | | | | | $ | 23 | | | | | $ | 38 | | |
| Other income | | | | | — | | | | | | — | | | | | | — | | |
| Total income | | | | | 13 | | | | | | 23 | | | | | | 38 | | |
| Expenses | | | | | 2,295 | | | | | | 3,444 | | | | | | 2,714 | | |
| Loss before equity in undistributed earnings of subsidiaries | | | | | (2,282) | | | | | | (3,421) | | | | | | (2,676) | | |
| Equity in undistributed earnings of subsidiaries | | | | | 16,112 | | | | | | 15,771 | | | | | | 11,706 | | |
| Net Income | | | | $ | 13,830 | | | | | $ | 12,350 | | | | | $ | 9,030 | | |
| | |||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (In Thousands) | |||||||||||||||||
| Interest income | $ | 16 | $ | 17 | $ | 15 | |||||||||||
| Dividend income from subsidiary | 24,600 | 7,500 | 4,000 | ||||||||||||||
| Total income | 24,616 | 7,517 | 4,015 | ||||||||||||||
| Expenses | 4,325 | 3,488 | 3,444 | ||||||||||||||
| Income before equity in undistributed earnings of subsidiaries | 20,291 | 4,029 | 571 | ||||||||||||||
| Equity in undistributed earnings of subsidiaries | (14,387) | 14,187 | 16,862 | ||||||||||||||
| Net Income | $ | 5,904 | $ | 18,216 | $ | 17,433 | |||||||||||
113
Condensed Statements of Cash Flows
| | | For the Years Ended December 31, | | |||||||||||||||||||||||||||||||||
| | | 2017 | | 2016 | | 2015 | | |||||||||||||||||||||||||||||
| | | (Dollars in Thousands) | | |||||||||||||||||||||||||||||||||
| For the Years Ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||||||||||||||
| Cash flows from operating activities | | | | | | | | | | | | | | | | | Cash flows from operating activities | |||||||||||||||||||
| Net income | | | $ | 13,830 | | | | $ | 12,350 | | | | $ | 9,030 | | | Net income | $ | 5,904 | $ | 18,216 | $ | 17,433 | |||||||||||||
| Adjustments to reconcile net income to net cash used by operating activities: | | | | | | | | | | | | | | | | | ||||||||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||||||||||||||||||||
| Equity in undistributed earnings | | | | (16,112) | | | | | (15,771) | | | | | (11,706) | | | Equity in undistributed earnings | 14,387 | (14,187) | (16,862) | ||||||||||||||||
| Increase in other assets | | | | (5,179) | | | | | (1,828) | | | | | (418) | | | ||||||||||||||||||||
| Decrease (Increase) in deferred income taxes, net | | | | 3,010 | | | | | 2,385 | | | | | (2,192) | | | ||||||||||||||||||||
| Increase in other liabilities | | | | 380 | | | | | 1,620 | | | | | 421 | | | ||||||||||||||||||||
| Decrease in other assets | Decrease in other assets | 327 | 84 | 6,131 | ||||||||||||||||||||||||||||||||
| Increase in deferred income taxes, net | Increase in deferred income taxes, net | (18) | (57) | (76) | ||||||||||||||||||||||||||||||||
| Decrease in other liabilities | Decrease in other liabilities | (654) | (26) | (1,296) | ||||||||||||||||||||||||||||||||
| Stock-based compensation | | | | 917 | | | | | 1,188 | | | | | 1,033 | | | Stock-based compensation | 1,770 | 1,020 | 1,290 | ||||||||||||||||
| Amortization of debt issuance costs | | | | 52 | | | | | 51 | | | | | — | | | Amortization of debt issuance costs | 52 | 52 | 52 | ||||||||||||||||
| Net cash used by operating activities | | | | (3,102) | | | | | (5) | | | | | (3,832) | | | ||||||||||||||||||||
| Net cash provided by operating activities | Net cash provided by operating activities | 21,768 | 5,102 | 6,672 | ||||||||||||||||||||||||||||||||
| Cash flows from investing activities | | | | | | | | | | | | | | | | | Cash flows from investing activities | |||||||||||||||||||
| Capital contribution to Bankwell Bank | | | | — | | | | | — | | | | | (15,000) | | | ||||||||||||||||||||
| Decrease in premises and equipment, net | | | | 37 | | | | | 65 | | | | | 84 | | | Decrease in premises and equipment, net | 4 | 4 | 6 | ||||||||||||||||
| Net cash provided by (used by) investing activities | | | | 37 | | | | | 65 | | | | | (14,916) | | | ||||||||||||||||||||
| Net cash provided by investing activities | Net cash provided by investing activities | 4 | 4 | 6 | ||||||||||||||||||||||||||||||||
| Cash flows from financing activities | | | | | | | | | | | | | | | | | Cash flows from financing activities | |||||||||||||||||||
| Proceeds from issuance of subordinated debt | | | | — | | | | | — | | | | | 25,000 | | | ||||||||||||||||||||
| Redemption of SBLF Preferred Stock | | | | — | | | | | — | | | | | (10,980) | | | ||||||||||||||||||||
| Proceeds from exercise of options & warrants | | | | 2,031 | | | | | 1,106 | | | | | 501 | | | Proceeds from exercise of options & warrants | 16 | 30 | 936 | ||||||||||||||||
| Dividends paid on common stock | | | | (2,149) | | | | | (1,661) | | | | | (376) | | | Dividends paid on common stock | (4,389) | (4,079) | (3,759) | ||||||||||||||||
| Dividends paid on preferred stock | | | | — | | | | | — | | | | | (125) | | | ||||||||||||||||||||
| Proceeds from issuance of common stock | | | | — | | | | | 200 | | | | | 3,780 | | | ||||||||||||||||||||
| Net tax benefit related to stock-based compensation | | | | — | | | | | 280 | | | | | — | | | ||||||||||||||||||||
| Net cash (used by) provided by financing activities | | | | (118) | | | | | (75) | | | | | 17,800 | | | ||||||||||||||||||||
| Net decrease in cash and cash equivalents | | | | (3,183) | | | | | (15) | | | | | (948) | | | ||||||||||||||||||||
| Repurchase of common stock | Repurchase of common stock | (1,037) | (988) | 0 | ||||||||||||||||||||||||||||||||
| Net cash used in financing activities | Net cash used in financing activities | (5,410) | (5,037) | (2,823) | ||||||||||||||||||||||||||||||||
| Net increase in cash and cash equivalents | Net increase in cash and cash equivalents | 16,362 | 69 | 3,855 | ||||||||||||||||||||||||||||||||
| Cash and cash equivalents: | | | | | | | | | | | | | | | | | Cash and cash equivalents: | |||||||||||||||||||
| Beginning of year | | | | 5,677 | | | | | 5,692 | | | | | 6,640 | | | Beginning of year | 6,418 | 6,349 | 2,494 | ||||||||||||||||
| End of year | | | $ | 2,494 | | | | $ | 5,677 | | | | $ | 5,692 | | | End of year | $ | 22,780 | $ | 6,418 | $ | 6,349 | |||||||||||||
| Supplemental disclosures of cash flows information: | | | | | | | | | | | | | | | | | Supplemental disclosures of cash flows information: | |||||||||||||||||||
| Cash paid for: | | | | | | | | | | | | | | | | | Cash paid for: | |||||||||||||||||||
| Interest | | | $ | — | | | | $ | — | | | | $ | — | | | Interest | 0 | 0 | 0 | ||||||||||||||||
| Income taxes | | | | — | | | | | — | | | | | — | | | Income taxes | 0 | 0 | 0 | ||||||||||||||||
114
24.
Quarterly Financial Information of Bankwell Financial Group, Inc. (Unaudited)
The following table presentstables present selected quarterly financial information (unaudited):
| | | | | | | | | | 2017 | | |||||||||||||||
| | | | 4th Quarter | | | 3rd Quarter | | | 2nd Quarter | | | 1st Quarter | | ||||||||||||
| Total interest income | | | | $ | 18,729 | | | | | $ | 18,348 | | | | | $ | 17,688 | | | | | $ | 16,436 | | |
| Total interest expense | | | | | 4,815 | | | | | | 4,487 | | | | | | 4,047 | | | | | | 3,488 | | |
| Net interest income | | | | | 13,914 | | | | | | 13,861 | | | | | | 13,641 | | | | | | 12,948 | | |
| (Credit) Provision for loan losses | | | | | (495) | | | | | | 398 | | | | | | 895 | | | | | | 543 | | |
| Non-interest income | | | | | 1,541 | | | | | | 824 | | | | | | 998 | | | | | | 1,266 | | |
| Non-interest expense | | | | | 8,579 | | | | | | 8,129 | | | | | | 7,581 | | | | | | 8,234 | | |
| Income before income taxes | | | | | 7,371 | | | | | | 6,158 | | | | | | 6,163 | | | | | | 5,437 | | |
| Provision from income taxes | | | | | 5,275 | | | | | | 1,895 | | | | | | 2,394 | | | | | | 1,735 | | |
| Net income | | | | $ | 2,096 | | | | | $ | 4,263 | | | | | $ | 3,769 | | | | | $ | 3,702 | | |
| Net income attributable to common stockholders | | | | $ | 2,096 | | | | | $ | 4,263 | | | | | $ | 3,769 | | | | | $ | 3,702 | | |
| Earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | | $ | 0.27 | | | | | $ | 0.55 | | | | | $ | 0.49 | | | | | $ | 0.49 | | |
| Diluted | | | | $ | 0.27 | | | | | $ | 0.55 | | | | | $ | 0.49 | | | | | $ | 0.48 | | |
| | | | 2016 | | |||||||||||||||||||||
| | | | 4th Quarter | | | 3rd Quarter | | | 2nd Quarter | | | 1st Quarter | | ||||||||||||
| Total interest income | | | | $ | 16,642 | | | | | $ | 15,633 | | | | | $ | 14,711 | | | | | $ | 14,004 | | |
| Total interest expense | | | | | 3,354 | | | | | | 3,106 | | | | | | 2,832 | | | | | | 2,606 | | |
| Net interest income | | | | | 13,288 | | | | | | 12,527 | | | | | | 11,879 | | | | | | 11,398 | | |
| Provision for loan losses | | | | | 748 | | | | | | 1,219 | | | | | | 1,301 | | | | | | 646 | | |
| Non-interest income | | | | | 401 | | | | | | 750 | | | | | | 853 | | | | | | 672 | | |
| Non-interest expense | | | | | 7,768 | | | | | | 7,481 | | | | | | 7,215 | | | | | | 7,080 | | |
| Income before income taxes | | | | | 5,173 | | | | | | 4,577 | | | | | | 4,216 | | | | | | 4,344 | | |
| Provision from income taxes | | | | | 1,850 | | | | | | 1,437 | | | | | | 1,320 | | | | | | 1,353 | | |
| Net income | | | | $ | 3,323 | | | | | $ | 3,140 | | | | | $ | 2,896 | | | | | $ | 2,991 | | |
| Net income attributable to common stockholders | | | | $ | 3,323 | | | | | $ | 3,140 | | | | | $ | 2,896 | | | | | $ | 2,991 | | |
| Earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | | $ | 0.44 | | | | | $ | 0.42 | | | | | $ | 0.38 | | | | | $ | 0.40 | | |
| Diluted | | | | $ | 0.43 | | | | | $ | 0.41 | | | | | $ | 0.38 | | | | | $ | 0.40 | | |
| December 31, 2020 | |||||||||||||||||||||||
| 4th Quarter | 3rd Quarter | 2nd Quarter | 1st Quarter | ||||||||||||||||||||
| (Dollars in thousands, except per share amounts) | |||||||||||||||||||||||
| Total interest and dividend income | $ | 19,146 | $ | 18,922 | $ | 19,323 | $ | 20,096 | |||||||||||||||
| Total interest expense | 4,842 | 5,314 | 5,686 | 6,810 | |||||||||||||||||||
| Net interest income | 14,304 | 13,608 | 13,637 | 13,286 | |||||||||||||||||||
| Provision for loan losses | 709 | 712 | 2,999 | 3,185 | |||||||||||||||||||
| Total noninterest income | 621 | 614 | 577 | 1,072 | |||||||||||||||||||
| Total noninterest expense | 13,703 | 9,729 | 9,722 | 9,659 | |||||||||||||||||||
| Income before income tax expense | 513 | 3,781 | 1,493 | 1,514 | |||||||||||||||||||
| Income tax expense | 177 | 790 | 279 | 151 | |||||||||||||||||||
| Net income | $ | 336 | $ | 2,991 | $ | 1,214 | $ | 1,363 | |||||||||||||||
| Earnings per common share: | |||||||||||||||||||||||
| Basic | $ | 0.04 | $ | 0.38 | $ | 0.16 | $ | 0.17 | |||||||||||||||
| Diluted | $ | 0.04 | $ | 0.38 | $ | 0.16 | $ | 0.17 | |||||||||||||||
In the fourth quarter of 2020, the Company recognized a $3.9 million one-time charge recorded in noninterest expense for office consolidation, vendor contract termination and employee severance costs.
The office consolidation costs, which totaled $2.0 million as of December 31, 2020 primarily related to a $1.7 million write down of a Bank owned property that is currently being marketed for sale and an impairment charge of $0.3 million relating to a right of use asset on a leased property. The Company expects the office consolidation process to be substantially complete by the end of the second quarter of 2021.
The vendor contract termination cost, which totaled $1.1 million as of December 31, 2020 was due to the retirement of a legacy online banking application, which will be replaced with an application to drive commercial deposit growth. The vendor contract termination cost is expected to be paid prior to the end of the second quarter of 2021. The vendor contract termination cost is included in data processing expense on the consolidated statements of income.
The employee severance costs, which totaled $0.8 million related to a Voluntary Early Retirement Incentive Plan offered to eligible employees and additional severance charges recognized during the fourth quarter of 2020. A total of $24 thousand of employee severance costs has been paid as of December 31, 2020 and the remainder is expected to be paid prior to the end of the first quarter of 2021. The employee severance costs are included in salaries and employee benefits expense on the consolidated statements of income.
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| December 31, 2019 | |||||||||||||||||||||||
| 4th Quarter | 3rd Quarter | 2nd Quarter | 1st Quarter | ||||||||||||||||||||
| (Dollars in thousands, except per share amounts) | |||||||||||||||||||||||
| Total interest and dividend income | $ | 19,933 | $ | 20,493 | $ | 21,046 | $ | 21,476 | |||||||||||||||
| Total interest expense | 7,051 | 7,482 | 7,451 | 7,203 | |||||||||||||||||||
| Net interest income | 12,882 | 13,011 | 13,595 | 14,273 | |||||||||||||||||||
| Provision (credit) for loan losses | 310 | 773 | (841) | 195 | |||||||||||||||||||
| Total noninterest income | 1,048 | 1,552 | 1,336 | 1,308 | |||||||||||||||||||
| Total noninterest expense | 9,224 | 8,672 | 8,755 | 8,975 | |||||||||||||||||||
| Income before income tax expense | 4,396 | 5,118 | 7,017 | 6,411 | |||||||||||||||||||
| Income tax expense | 924 | 1,030 | 1,441 | 1,331 | |||||||||||||||||||
| Net income | $ | 3,472 | $ | 4,088 | $ | 5,576 | $ | 5,080 | |||||||||||||||
| Earnings per common share: | |||||||||||||||||||||||
| Basic | $ | 0.44 | $ | 0.52 | $ | 0.71 | $ | 0.65 | |||||||||||||||
| Diluted | $ | 0.44 | $ | 0.52 | $ | 0.71 | $ | 0.65 | |||||||||||||||
Note: Due to rounding, quarterly earnings per share may not sum to reported annual earnings per share.
Subsequent to the fourth quarteryear ended December 31, 2020, as of 2017February 28, 2021, the Company had changed its methodology to estimate its allowance for loan losses. The change in methodology resulted in an update to the underlying loan loss assumptions, incorporating the most recent industry, peer and product loss trends. This resulted in a non-recurring, pretax $1.3 million reduction in the reserve. In addition, On December 22, 2017 the Tax Cuts and Jobs Act of 2017 was signed into law. As a result, the corporate tax rate was reduced from 35% to 21%. Companies are required to recognize the effect of tax law changes in the period of enactment in accordance with GAAP. As result of the tax law changes the Company recognized a write-downpurchased 65,626 shares of its deferred tax asset in the amountCommon Stock at a weighted average price of $3.3 million.
$21.66 per share.Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9a.
9A. Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of Bankwell’s disclosure controls and procedures (as defined in RuleRules 13a-15(e) and 15d15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, because of the material weakness in internal control over financial reporting described below, management, including the Chief Executive Officer and Chief Financial Officer, concluded that Bankwell’s disclosure controls and procedures were not effective as of the end of the period covered by this report.
Internal Control over Financial Reporting
Bankwell’s management has issued a report on its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017.2020. As of December 31, 2017,2020, senior management concluded that Bankwell did not maintainmaintained effective internal control over financial reporting due to a material weakness associated with its process over the allowance for loan losses. The material weakness discussed below was originally identifiedreporting.
There were no changes made in the assessment ofCompany's internal control over financial reporting that was conducted as ofoccurred during the fiscal quarter ended December 31, 2017.2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The report of Bankwell’sthe Company's management follows.
Management’s Report on Internal Control over Financial Reporting
The management of Bankwell Financial Group and its Subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). The Company’s internal control over financial reporting is a process designed under the supervision of its Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
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Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 20172020 based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management concluded that internal control over financial reporting was not effective as of December 31, 2017 as a result of an identified material weakness resulting from the aggregation of control deficiencies in management’s review of the allowance for loan losses, including certain process level controls to ensure the completeness and accuracy of loan reports used in the classification of loans as well as the precision of management’s review over the calculation of the allowance for loan losses balance. This material weakness did not result in any misstatement of the Company’s consolidated financial statements, including the allowance for loan losses, for any period presented.
Based on management’s assessment, and as a result of the material weakness discussed above, management concluded that, as of December 31, 2017,2020, the Company’s internal control over financial reporting was not effective based on criteria established in Internal Control-Integrated Framework (2013) issued by COSO.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
In accordance with the rules and regulations of the SEC, management’s report on the design and effectiveness of Bankwell’s system of internal controlscontrol over financial reporting is not subject to attestation by Bankwell’s independent registered public accounting firm. The SEC rules and regulations applicable to
Bankwell only require a report by management. Accordingly, this annual report filed on Form 10-K for the year ended December 31, 20172020 does not include an opinion by Bankwell’s independent registered public accounting firm regarding management’s system of internal controlscontrol over financial reporting.
Item 9b.
9B. Other Information
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PART III
Item 10.
Directors, Executive Officers and Corporate Governance
The Company responds to this item by incorporating herein by reference the material responsive to such item in the Company’s definitive proxy statement for its 20182021 Annual Meeting of Stockholders, to be filed with the Commission no later than April 30, 2018.2021.
Item 11.
Executive Compensation
The Company responds to this item by incorporating herein by reference the material responsive to such item in the Company’s definitive proxy statement for its 20182021 Annual Meeting of Stockholders, to be filed with the Commission no later than April 30, 2018.2021.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The Company responds to this item by incorporating herein by reference the material responsive to such item in the Company’s definitive proxy statement for its 20182021 Annual Meeting of Stockholders, to be filed with the Commission no later than April 30, 2018.2021.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The Company responds to this item by incorporating herein by reference the material responsive to such item in the Company’s definitive proxy statement for its 20182021 Annual Meeting of Stockholders, to be filed with the Commission no later than April 30, 2018.2021.
Item 14.
Principal Accountant Fees and Services
The Company responds to this item by incorporating herein by reference the material responsive to such item in the Company’s definitive proxy statement for its 20182021 Annual Meeting of Stockholders, to be filed with the Commission no later than April 30, 2018.2021.
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PART IV
Item 15.
Exhibits, Financial Statement Schedules
Exhibits, Financial Statement Schedules
The following consolidated financial statements of the Company are included in Item 8 of this report:
Consolidated Statements of Shareholders' Equity - For the years ended December 31, 2020, 2019 and 2018
(A)(2) FINANCIAL STATEMENT SCHEDULES
Certain schedules to the consolidated financial statements have been omitted if they were not required by Article 9 of Regulation S-X or if, under the related instructions, they were inapplicable, or the information was contained elsewhere herein.
(A)(3) EXHIBITS
The exhibits listed in the Exhibit Index in this Form 10-K are filed herewith or are incorporated herein by reference to other SEC filings.
119
Exhibit Index
| Number | Description | |||||||||
| Exhibit 3.1 | ||||||||||
| Exhibit 3.2 | ||||||||||
| Exhibit 4.1 | ||||||||||
| Exhibit 10.1† | ||||||||||
| Exhibit | ||||||||||
| Exhibit | ||||||||||
| Exhibit | ||||||||||
| Exhibit | ||||||||||
| Exhibit | ||||||||||
| Exhibit | ||||||||||
| Exhibit | ||||||||||
| Exhibit | ||||||||||
| Exhibit | ||||||||||
| Exhibit | ||||||||||
| Exhibit 10.12† | ||||||||||
| Exhibit 10.13 | ||||||||||
| Exhibit 10.14† | ||||||||||
| Exhibit 10.15† | ||||||||||
| Exhibit 21.1 | ||||||||||
| Exhibit | ||||||||||
| Exhibit 31.1 | ||||||||||
| Exhibit 31.2 | ||||||||||
| Exhibit 32 | ||||||||||
| 101 | The following materials from Bankwell Financial Group, Inc.’s Annual Report on Form 10-K for the period ended December 31, | |||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||||
†
Management contract or compensatory plan or arrangement
(1)
Filed as part of the Registrant’s Registration Statement on Form S-1 filed on April 4, 2014.
(2)
Filed as part of the Registrant’s Amendment No. 1 to Registration Statement on Form S-1 filed on May 5, 2014.
(3)
Filed as part of the Registrant’s December 31, 2016 Form 10-K.
(4) Filed as part of the Registrant's June 30, 2018 Form 10-Q.
(5) Filed as part of the Registrant's December 31, 2019 Form 10-K
Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BANKWELL FINANCIAL GROUP, INC. | |||||||||||||
| By: | /s/ Christopher R. Gruseke | ||||||||||||
| Christopher R. Gruseke President and Chief Executive Officer | |||||||||||||
Dated: March 10, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature & Title | Date | ||||||||||||
/s/ Christopher R. Gruseke | March 10, 2021 | ||||||||||||
| Christopher R. Gruseke President, (principal executive officer) | |||||||||||||
/s/ Penko Ivanov | March 10, 2021 | ||||||||||||
| Penko Ivanov Executive Vice President & Chief Financial Officer (principal financial and accounting officer) | |||||||||||||
/s/ George P. Bauer | March 10, 2021 | ||||||||||||
| George P. Bauer Director | |||||||||||||
/s/ Gail Brathwaite | March | ||||||||||||
Gail Brathwaite Director | |||||||||||||
| /s/ Richard Castiglioni | March | ||||||||||||
Richard Castiglioni Director | |||||||||||||
| /s/ Eric J. Dale | March 10, 2021 | ||||||||||||
| Eric J. Dale Director | |||||||||||||
/s/ Blake S. Drexler | March 10, 2021 | ||||||||||||
| Blake S. Drexler Director | |||||||||||||
/s/ James | March | ||||||||||||
James M. Garnett Director | |||||||||||||
| /s/ Daniel S. Jones | March 10, 2021 | ||||||||||||
| Daniel S. Jones Director | |||||||||||||
/s/ Todd Lampert | March | ||||||||||||
Todd Lampert Director | |||||||||||||
| /s/ Victor S. Liss | March 10, 2021 | ||||||||||||
| Victor S. Liss Director | |||||||||||||
/s/ Carl M. Porto | March 10, 2021 | ||||||||||||
| Carl M. Porto Director | |||||||||||||
| /s/ Lawrence B. Seidman | |||||||||||||
| Lawrence B. Seidman Director | |||||||||||||
121