Bankwell Financial Group Inc.

11/06/2024 | Press release | Distributed by Public on 11/06/2024 13:19

Quarterly Report for Quarter Ending September 30, 2024 (Form 10-Q)

bwfg-20240930
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2024
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to________
Commission File Number: 001-36448
Bankwell Financial Group, Inc.
(Exact Name of Registrant as specified in its Charter)
Connecticut 20-8251355
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
258 Elm Street
New Canaan, Connecticut 06840
(203) 652-0166
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 		Trading Symbol(s)
 		Name of Each Exchange on Which
Registered
Common Stock, no par value per
share
BWFG
NASDAQ Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þYes ¨No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þYes ¨No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer ☑
Non-accelerated filer
☐ Smaller reporting company ☑
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
1
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐Yes þNo
As of October 30, 2024, therewere 7,858,573 shares of the registrant's common stock outstanding.
2
Bankwell Financial Group, Inc.
Form 10-Q
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
4
Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023
4
Consolidated Statements of Income for the three and nine months ended September 30, 2024 and 2023
5
Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2024 and 2023
6
Consolidated Statements of Shareholders' Equity for the three and nine months ended September 30, 2024 and 2023
7
Consolidated Statements of Cash Flows for the nine months ended September 30, 2024 and 2023
9
Notes to Consolidated Financial Statements
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
50
Item 3. Quantitative and Qualitative Disclosures About Market Risk
66
Item 4. Controls and Procedures
66
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
66
Item 1A. Risk Factors
66
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
67
Item 3. Defaults Upon Senior Securities
67
Item 4. Mine Safety Disclosures
67
Item 5. Other Information
67
Item 6. Exhibits
68
Signatures
68
Certifications
3
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Bankwell Financial Group, Inc.
Consolidated Balance Sheets - (unaudited)
(In thousands, except share data)
September 30, 2024 December 31, 2023
ASSETS
Cash and due from banks $ 275,829 $ 267,521
Federal funds sold 15,508 1,636
Cash and cash equivalents 291,337 269,157
Investment securities
Marketable equity securities, at fair value 2,148 2,070
Available for sale investment securities, at fair value 108,866 109,736
Held to maturity investment securities, at amortized cost (fair values of $37,125 and $15,903 at September 30, 2024 and December 31, 2023, respectively)
34,886 15,817
Total investment securities 145,900 127,623
Loans receivable (net of ACL-Loans of $27,752 at September 30, 2024 and $27,946 at December 31, 2023)
2,591,551 2,685,301
Accrued interest receivable 14,714 14,863
Federal Home Loan Bank stock, at cost 5,655 5,696
Premises and equipment, net 24,780 27,018
Bank-owned life insurance 52,443 51,435
Goodwill 2,589 2,589
Deferred income taxes, net 9,300 9,383
Other assets 22,811 22,417
Total assets $ 3,161,080 $ 3,215,482
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest bearing deposits $ 295,552 $ 346,172
Interest bearing deposits 2,392,619 2,390,585
Total deposits 2,688,171 2,736,757
Advances from the Federal Home Loan Bank 90,000 90,000
Subordinated debentures (face value of $70,000 and $70,000 at September 30, 2024 and December 31, 2023, respectively, less unamortized debt issuance costs of $611 and $795 at September 30, 2024 and December 31, 2023, respectively)
69,389 69,205
Accrued expenses and other liabilities 45,594 53,768
Total liabilities 2,893,154 2,949,730
Commitments and contingencies
Shareholders' equity
Common stock, no par value; 10,000,000 shares authorized, 7,858,573 and 7,882,616 shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively
118,429 118,247
Retained earnings 151,257 149,169
Accumulated other comprehensive loss (1,760) (1,664)
Total shareholders' equity 267,926 265,752
Total liabilities and shareholders' equity $ 3,161,080 $ 3,215,482
See accompanying notes to consolidated financial statements (unaudited)
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Bankwell Financial Group, Inc.
Consolidated Statements of Income - (unaudited)
(In thousands, except share data)
Three Months Ended September 30, Nine Months Ended September 30,
2024 2023 2024 2023
Interest and dividend income
Interest and fees on loans $ 43,596 $ 43,854 $ 129,981 $ 126,059
Interest and dividends on securities 1,390 1,016 3,710 3,018
Interest on cash and cash equivalents 3,205 3,393 10,460 9,983
Total interest and dividend income 48,191 48,263 144,151 139,060
Interest expense
Interest expense on deposits 25,579 23,789 75,618 61,599
Interest expense on borrowings 1,895 1,783 5,450 5,238
Total interest expense 27,474 25,572 81,068 66,837
Net interest income 20,717 22,691 63,083 72,223
Provision (credit) for credit losses 6,296 (1,579) 18,162 1,826
Net interest income after provision (credit) for credit losses 14,421 24,270 44,921 70,397
Noninterest income
Bank-owned life insurance 346 303 1,008 876
Service charges and fees 575 294 1,374 941
Gains and fees from sales of loans 133 237 499 1,893
Other 102 (48) (127) 3
Total noninterest income 1,156 786 2,754 3,713
Noninterest expense
Salaries and employee benefits 6,223 6,036 18,690 18,507
Occupancy and equipment 2,334 2,146 6,894 6,434
Professional services 1,142 491 3,196 2,505
Data processing 851 741 2,346 2,141
Director fees 292 362 1,498 1,207
FDIC insurance 853 1,026 2,488 3,138
Marketing 73 184 277 512
Other 1,097 1,219 3,018 3,093
Total noninterest expense 12,865 12,205 38,407 37,537
Income before income tax expense 2,712 12,851 9,268 36,573
Income tax expense 786 3,074 2,461 8,434
Net income $ 1,926 $ 9,777 $ 6,807 $ 28,139
Earnings Per Common Share:
Basic $ 0.24 $ 1.25 $ 0.86 $ 3.61
Diluted $ 0.24 $ 1.25 $ 0.86 $ 3.58
Weighted Average Common Shares Outstanding:
Basic 7,715,040 7,598,230 7,708,768 7,582,272
Diluted 7,720,895 7,633,934 7,731,454 7,646,837
Dividends per common share $ 0.20 $ 0.20 $ 0.60 $ 0.60
See accompanying notes to consolidated financial statements (unaudited)
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Bankwell Financial Group, Inc.
Consolidated Statements of Comprehensive Income (Loss) - (unaudited)
(In thousands)
Three Months Ended September 30, Nine Months Ended September 30,
2024 2023 2024 2023
Net income $ 1,926 $ 9,777 $ 6,807 $ 28,139
Other comprehensive income:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) on available for sale securities 2,684 (752) 2,866 (1,941)
Reclassification adjustment for gains realized in net income - - - -
Net change in unrealized gains (losses) 2,684 (752) 2,866 (1,941)
Income tax (expense) benefit (634) 173 (628) 501
Unrealized gains (losses) on securities, net of tax 2,050 (579) 2,238 (1,440)
Unrealized (losses) gains on interest rate swaps:
Unrealized (losses) gains on interest rate swaps (2,429) 1,001 (3,012) 205
Income tax benefit (expense) 575 (230) 678 (100)
Unrealized (losses) gains on interest rate swaps, net of tax (1,854) 771 (2,334) 105
Total other comprehensive income (loss), net of tax 196 192 (96) (1,335)
Comprehensive income $ 2,122 $ 9,969 $ 6,711 $ 26,804
See accompanying notes to consolidated financial statements (unaudited)
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Bankwell Financial Group, Inc.
Consolidated Statements of Shareholders' Equity - (unaudited)
(In thousands, except share data)
Number of Outstanding Shares Common Stock Retained Earnings Accumulated Other Comprehensive (Loss) Income Total
Balance at June 30, 2024 7,866,499 $ 118,037 $ 150,895 $ (1,956) $ 266,976
Net income - - 1,926 - 1,926
Other comprehensive income, net of tax - - - 196 196
Cash dividends declared ($0.20 per share)
- - (1,564) - (1,564)
Stock-based compensation expense - 623 - - 623
Forfeitures of restricted stock (1,562) - - - -
Issuance of restricted stock 3,306 - - - -
Repurchase of common stock (9,670) (231) - - (231)
Balance at September 30, 2024 7,858,573 $ 118,429 $ 151,257 $ (1,760) $ 267,926
Number of Outstanding Shares Common Stock Retained Earnings Accumulated Other Comprehensive (Loss) Income Total
Balance at June 30, 2023 7,829,950 $ 116,541 $ 133,988 $ (1,716) $ 248,813
Net income - - 9,777 - 9,777
Other comprehensive income, net of tax - - - 192 192
Cash dividends declared ($0.20 per share)
- - (1,560) - (1,560)
Stock-based compensation expense - 640 - - 640
Issuance of restricted stock 11,666 - - - -
Repurchase of common stock - - - - -
Balance at September 30, 2023 7,841,616 $ 117,181 $ 142,205 $ (1,524) $ 257,862
See accompanying notes to consolidated financial statements (unaudited)
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Number of Outstanding Shares Common Stock Retained Earnings Accumulated Other Comprehensive (Loss) Income Total
Balance at December 31, 2023 7,882,616 $ 118,247 $ 149,169 $ (1,664) $ 265,752
Net income - - 6,807 - 6,807
Other comprehensive (loss), net of tax - - - (96) (96)
Cash dividends declared ($0.60 per share)
- - (4,719) - (4,719)
Stock-based compensation expense - 2,319 - - 2,319
Forfeitures of restricted stock (4,262) - - - -
Issuance of restricted stock 66,209 - - - -
Stock options exercised - - - - -
Repurchase of common stock (85,990) (2,137) - - (2,137)
Balance at September 30, 2024 7,858,573 $ 118,429 $ 151,257 $ (1,760) $ 267,926
Number of Outstanding Shares Common Stock Retained Earnings Accumulated Other Comprehensive (Loss) Income Total
Balance at December 31, 2022 7,730,699 $ 115,018 $ 123,640 $ (189) $ 238,469
Cumulative effect of change in accounting principle (ASU No. 2016-13), net of tax - - (4,893) - $ (4,893)
Balance as of January 1, 2023 as adjusted
for changes in accounting principle 		7,730,699 115,018 118,747 (189) $ 233,576
Net income - - 28,139 - 28,139
Other comprehensive (loss), net of tax - - - (1,335) (1,335)
Cash dividends declared ($0.60 per share)
- - (4,681) - (4,681)
Stock-based compensation expense - 2,008 - - 2,008
Forfeitures of restricted stock (15,438) - - - -
Issuance of restricted stock 117,675 - - - -
Stock options exercised 8,680 155 - - 155
Repurchase of common stock - - - - -
Balance at September 30, 2023 7,841,616 $ 117,181 $ 142,205 $ (1,524) $ 257,862
See accompanying notes to consolidated financial statements (unaudited)
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Bankwell Financial Group, Inc.
Consolidated Statements of Cash Flows - (unaudited)
(In thousands)
Nine Months Ended September 30,
2024 2023
Cash flows from operating activities
Net income $ 6,807 $ 28,139
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premiums and discounts on investment securities 131 51
Provision for credit losses 18,162 1,826
Provision (credit) for deferred income taxes 132 (114)
Change in fair value of marketable equity securities (33) 49
Depreciation and amortization 2,805 2,683
Amortization of debt issuance costs 185 185
Increase in cash surrender value of bank-owned life insurance (1,008) (876)
Gains and fees from sales of loans (499) (1,893)
Stock-based compensation 2,319 2,008
Loss on sale of premises and equipment - 13
Net change in:
Deferred loan fees (1,458) (1,048)
Accrued interest receivable 148 (2,579)
Other assets (4,097) (3,206)
Accrued expenses and other liabilities (7,973) 7,216
Net cash provided by operating activities 15,621 32,454
Cash flows from investing activities
Proceeds from principal repayments on available for sale securities 3,743 3,758
Proceeds from principal repayments on held to maturity securities 82 153
Purchases of marketable equity securities (46) (37)
Purchases of held to maturity securities (19,289) (50)
Net decrease (increase) in loans 73,376 (118,992)
Proceeds from sales of loans not originated for sale 4,662 24,127
Purchases of premises and equipment, net (567) (1,799)
Reduction (purchases) of Federal Home Loan Bank stock 41 (480)
Net cash provided by (used in) investing activities 62,002 (93,320)
See accompanying notes to consolidated financial statements (unaudited)
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Bankwell Financial Group, Inc.
Consolidated Statements of Cash Flows - (unaudited) (Continued)
(In thousands)
Nine Months Ended September 30,
2024 2023
Cash flows from financing activities
Net change in time certificates of deposit $ 76,044 $ 112,899
Net change in other deposits (124,631) (145,091)
Proceeds from exercise of options - 155
Dividends paid on common stock (4,719) (4,681)
Repurchase of common stock (2,137) -
Net cash used in financing activities (55,443) (36,718)
Net increase (decrease) in cash and cash equivalents 22,180 (97,584)
Cash and cash equivalents:
Beginning of year 269,157 355,679
End of period $ 291,337 $ 258,095
Supplemental disclosures of cash flows information:
Cash paid for:
Interest $ 82,911 $ 55,145
Income taxes 5,274 10,470
Noncash investing and financing activities:
Net change in unrealized gains or losses on available for sale securities 2,866 (1,941)
Net change in unrealized gains or losses on interest rate swaps (3,012) 205
Establishment of right-of-use asset and lease liability - 597
Transfer of loans from held-for-investment to held-for-sale 4,163 22,234
See accompanying notes to consolidated financial statements (unaudited)
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1. Nature of Operations and Summary of Significant Accounting Policies
Bankwell Financial Group, Inc. (the "Parent Corporation") is a bank holding company headquartered in New Canaan, Connecticut. The Parent Corporation offers a broad range of financial services through its banking subsidiary, Bankwell Bank (the "Bank" and, collectively with the Parent Corporation and the Parent Corporation's subsidiaries, "we", "our", "us", or the "Company").
The Bank is a Connecticut state chartered commercial bank, founded in 2002, whose deposits are insured under the Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation ("FDIC"). The Bank provides a wide range of services to clients in our market, an area encompassing approximately a 100 mile radius around our branch network. In addition, the Bank pursues certain types of commercial lending opportunities outside our market, particularly where we have strong business relationships. The Bank operates branches in New Canaan, Stamford, Fairfield, Westport, Darien, Norwalk, and Hamden, Connecticut.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and the Bank, including its wholly owned passive investment company subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America ("GAAP") and general practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities as of the date of the consolidated balance sheet, and revenue and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the allowance for credit losses, the valuation of derivative instruments, investment securities valuation, evaluation of investment securities for other than temporary impairment and deferred income taxes valuation.
Segments
The Company has one 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 one segment or unit.
Basis of consolidated financial statement presentation
The unaudited consolidated financial statements presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission ("SEC") for quarterly reports on Form 10-Q and Rule 10-01 of Regulation S-X and do not include all of the information and note disclosures required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for the fair presentation of the accompanying unaudited interim consolidated financial statements have been included. Interim results are not necessarily reflective of the results that may be expected for the year ending December 31, 2024. The accompanying unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included on Form 10-K for the year ended December 31, 2023.
Significant concentrations of credit risk
Many of the Company's activities are with clients located in Connecticut and New York, with the majority of the Company's commercial real estate investor loans in Connecticut and some New York metro area counties. Declines in property values in these areas could significantly impact the Company. The Company has a significant concentration in commercial real estate loans, with a growing percentage being owner-occupied, which present a lower risk profile.
ACL-Loans and Allowance for Credit Losses-Unfunded Commitments ("ACL-Unfunded Commitments")
The ACL-Loans is measured on each loan's amortized cost basis, excluding interest receivable, and is initially recognized upon origination or purchase of the loan, and subsequently remeasured on a recurring basis. The ACL-Loans is recognized as a contra-asset, and credit loss expense is recorded as a provision for loan losses in the consolidated statements of income. Loan
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losses are charged off against the ACL-Loans when management believes the loan is uncollectible. Subsequent recoveries, if any, are credited to the ACL-Loans. Loans are normally placed on nonaccrual status if it is probable that the Company will be unable to collect the full payment of principal and interest when due according to the contractual terms of the loan agreement, or the loan is past due for a period of 90 days or more unless the obligation is well-secured and is in the process of collection. The Company generally does not recognize an allowance for credit losses ("ACL") on accrued interest receivables, consistent with its policy to reverse interest income when interest is 90 days or more past due.
The Company also records an ACL-Unfunded commitments, which is based on the same assumptions as funded loans and also
considers the probability of funding. The ACL is recognized as a liability, and credit loss expense is recorded as a provision for
unfunded loan commitments within the provision for credit losses in the Consolidated statements of income.
For collectively evaluated loans and related unfunded commitments, the Company utilizes software provided by a third party, which includes various models for forecasting expected credit losses, to calculate its ACL. Management selected lifetime loss rate models, utilizing CRE, C&I, and Consumer specific models, to calculate the expected losses over the life of each loan based on exposure at default, loan attributes and reasonable, supportable economic forecasts. The models selected by the Company in its ACL calculation rely upon historical losses from a broad cross section of U.S. banks that also utilize the same third party for ACL calculations. Management reviewed the third party's analysis of the banks included in the models as part of their model development dataset and determined the Company's loan portfolio composition by property type, balance distribution by loan age, and delinquency status are similar, which supports the use of these loss rate models. The Company also noted the third party's model development dataset has loan concentrations that are evenly distributed across the United States, while the Company's portfolio is mainly concentrated in the Northeast. Based on the disparate regional concentration, management determined that a select group of peer banks is necessary to scale the loss rate models to produce an ACL that is more representative of the Company's loan portfolio. This peer-based calibration, called a "scalar", utilizes the loss rates of a subset of peer banks to appropriately scale the initial model results. These peers have been selected by the Company given their similar characteristics, such as loan portfolio composition and location, to better align the models' results to the Company's expected losses.
Key assumptions used in the models include portfolio segmentation, risk rating, forecasted economic scenarios, the peer scalar, and the expected utilization of unfunded commitments, among others. Our loan portfolios are segmented by loan level attributes such as loan type, size, date of origination, and delinquency status to create homogenous loan pools. Pool level metrics are calculated, and loss rates are subsequently applied to the pools as the loans have similar characteristics.
To account for economic uncertainty, the Company incorporates multiple economic scenarios in determining the ACL. The scenarios include various projections based on variables such as Gross Domestic Product, interest rates, property price indices, and employment measures, among others. The scenarios are probability-weighted based on available information at the time the calculation is conducted. As part of our ongoing governance of ACL, scenario weightings and model parameters are reviewed periodically by management and are subject to change, as deemed appropriate.
The Company also considers qualitative adjustments to expected credit loss estimates for information not already captured in the quantitative loss estimation models. Qualitative factor adjustments may increase or decrease management's estimate of expected credit losses. Qualitative loss factors are based on the Company's judgment of market, changes in loan composition or concentrations, performance trends, regulatory changes, uncertainty of macroeconomic forecasts, and other asset specific risk characteristics.
When loans do not share risk characteristics with other financial assets they are evaluated individually. Management applies its normal loan review procedures in making these judgments. Individually evaluated loans consist of loans with credit quality indicators which are substandard or doubtful. The Company also individually evaluates all insurance premium loans. While insurance premium loans are considered consumer loans, the third-party Consumer ACL model is designed for unsecured lending, whereas these loans are secured. To account for the fully secured structure of this type of loan, management determined each loan will be individually evaluated, regardless of the credit quality indicators. These loans are evaluated based upon their collateral, which primarily consists of cash, cash surrender value life insurance, and in some cases real estate. In determining the ACL-Loans for individually evaluated loans, the Company generally applies a discounted cash flow method for instruments that are individually assessed. For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable and where the borrower is experiencing financial difficulty, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. Fair value is generally calculated based on the value of the underlying collateral less an appraisal discount and the estimated cost to sell.
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ACL-Securities
The Company individually evaluates the available for sale debt securities and held to maturity securities for impairment credit losses. Available for sale securities include U.S. Treasuries, mortgage-backed securities, and corporate bonds. U.S. Treasuries and mortgaged-backed securities are guaranteed by the U.S. Government and as a result, management has a zero loss expectation. No ACL-Securities was recorded for these securities as of September 30, 2024. For the corporate bond portfolio, the Company developed a metric that includes each issuer's current credit ratings and key financial performance metrics to assess the underlying performance of each issuer. The analysis of the issuers' performance and the intent of the Company to retain these securities support the determination that there is no expected credit loss, and therefore, no ACL-Securities was recognized on the corporate bond portfolio as of September 30, 2024. Of our held to maturity securities portfolio, one security's fair value was less than its amortized cost as of September 30, 2024. Since this is a highly rated state agency and municipal obligation, the Company's expectation of nonpayment of the amortized cost basis is zero. No allowance for ACL-Securities was recorded for this security as of September 30, 2024.
Common share repurchases
The Company is incorporated in the state of Connecticut. Connecticut law does not provide for treasury shares, rather shares repurchased by the Company constitute authorized, but unissued shares. GAAP states that accounting for treasury stock shall conform to state law. Therefore, the cost of shares repurchased by the Company has been allocated to common stock balances.
Reclassification
Certain prior period amounts may be reclassified to conform to the 2024 financial statement presentation. These reclassifications only change the reporting categories and do not affect the consolidated results of operations or consolidated financial position of the Company.
Recent accounting pronouncements
The following section includes changes in accounting principles and potential effects of new accounting guidance and pronouncements.
Recently issued accounting pronouncements not yet adopted
ASU No. 2023-09-Income Taxes (Topic 740): "Improvements to Income Tax Disclosures": The amendments in this update provide more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2024. The Company believes this ASU will not have a material impact on existing disclosures and will continue to monitor for SEC action, and plan accordingly for adoption.
ASU No. 2023-06, Disclosure Improvements: "Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative":The amendments in this Update modify the disclosure or presentation requirements of a variety of Topics in the Codification. Certain of the amendments represent clarifications to or technical corrections of the current requirements. Because of the variety of Topics amended, a broad range of entities may be affected by one or more of those amendments. The summary of the amendments applicable to the Company include:
Statement of Cash Flows - Requires an accounting policy disclosure in annual periods of where cash flows associated with derivative instruments and their related gains and losses are presented in the statement of cash flows.
Accounting Changes and Error Corrections - Requires that when there has been a change in the reporting entity, the entity disclose any material prior-period adjustment and the effect of the adjustment on retained earnings in interim financial statements.
Earnings Per Share - Requires disclosure of the methods used in the diluted earnings-per-share computation for each dilutive security and clarifies that certain disclosures should be made during interim periods. Amends illustrative guidance to illustrate
disclosure of the methods used in the diluted earnings-per-share computation.
Interim Reporting - Conforms to the amendments made to Topic 250 (Accounting Changes and Error Correction).
Commitments - Requires disclosure of assets mortgaged, pledged, or otherwise subject to lien and the obligations collateralized.
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Debt - Requires disclosure of amounts and terms of unused lines of credit and unfunded commitments and the weighted-average interest rate on outstanding short-term borrowings. Entities that are not public business entities are not required to provide information about the weighted-average interest rate.
Equity - Requires entities that issue preferred stock to disclose preference in involuntary liquidation if the liquidation preference is other than par or stated value.
Derivatives - Adds cross-reference to disclosure requirements related to where cash flows associated with derivative instruments and their related gains and losses are presented in the statement of cash flows in Topic 230.
Transfers and Servicing-Secured Borrowing and Collateral - Requires:
a. That accrued interest be included in the disclosure of liabilities incurred in securities borrowing or repurchase or resale transactions.
b. Separate presentation of the aggregate carrying amount of reverse repurchase agreements on the face of the balance sheet if that amount exceeds 10 percent of total assets.
c. Disclosure of the weighted-average interest rates of repurchase liabilities for public business entities.
d. Disclosure of amounts at risk with an individual counterparty if that amount exceeds more than 10 percent of shareholder's equity.
e. Disclosure for reverse repurchase agreements that exceed 10 percent of total assets on whether there are any provisions in a reverse repurchase agreement to ensure that the market value of the underlying assets remains sufficient. to protect against counterparty default and, if so, the nature of those provisions.
Financial Services - Requires that investment companies disclose the components of capital on the balance sheet.
For entities subject to the SEC's existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC's removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. For all other entities, the amendments will be effective two years later. The amendments in this Update should be applied prospectively. For all entities, if by June 30, 2027, the SEC has not removed the applicable requirement from Regulation S-X or Regulation S-K, the pending content of the related amendment will be removed from the Codification and will not become effective for any entity. The Company believes this ASU will not have a material impact on existing disclosures and will continue to monitor for SEC action, and plan accordingly for adoption.
14
2. Investment Securities
The amortized cost, gross unrealized gains and losses and fair value of available for sale and held to maturity securities at September 30, 2024 were as follows:
September 30, 2024
Amortized Cost Gross Unrealized Fair Value
Gains Losses
(In thousands)
Available for sale securities:
U.S. Government and agency obligations
Less than one year $ 24,972 $ - $ (165) $ 24,807
Due from one through five years 47,551 112 (1,818) 45,845
Due from five through ten years 16,925 - (670) 16,255
Due after ten years 7,092 - (600) 6,492
Total U.S. Government and agency obligations 96,540 112 (3,253) 93,399
Corporate bonds
Due from five through ten years 15,500 - (1,173) 14,327
Due after ten years 1,500 - (360) 1,140
Total corporate bonds 17,000 - (1,533) 15,467
Total available for sale securities $ 113,540 $ 112 $ (4,786) $ 108,866
Held to maturity securities:
State agency and municipal obligations
Due from one through five years $ 5,383 $ 49 $ - $ 5,432
Due from five through ten years 2,819 30 - 2,849
Due after ten years 26,655 2,846 (687) 28,814
Government-sponsored mortgage backed securities
No contractual maturity 29 1 - 30
Total held to maturity securities $ 34,886 $ 2,926 $ (687) $ 37,125
15
The amortized cost, gross unrealized gains and losses and fair value of available for sale and held to maturity securities at December 31, 2023 were as follows:
December 31, 2023
Amortized Cost Gross Unrealized Fair Value
Gains Losses
(In thousands)
Available for sale securities:
U.S. Government and agency obligations
Less than one year $ 9,836 $ - $ (52) $ 9,784
Due from one through five years 55,288 123 (2,680) 52,731
Due from five through ten years 27,229 - (1,630) 25,599
Due after ten years 7,923 - (811) 7,112
Total U.S. Government and agency obligations 100,276 123 (5,173) 95,226
Corporate bonds
Due from five through ten years 15,500 - (2,028) 13,472
Due after ten years 1,500 - (462) 1,038
Total corporate bonds 17,000 - (2,490) 14,510
Total available for sale securities $ 117,276 $ 123 $ (7,663) $ 109,736
Held to maturity securities:
State agency and municipal obligations
Due after ten years $ 15,785 $ 716 $ (631) $ 15,870
Government-sponsored mortgage backed securities
No contractual maturity 32 1 - 33
Total held to maturity securities $ 15,817 $ 717 $ (631) $ 15,903
There were no sales of investment securities during the nine months ended September 30, 2024 or 2023.
At September 30, 2024 and December 31, 2023, none of the Company's securities were pledged as collateral with the Federal Home Loan Bank ("FHLB") or any other institution.
As of September 30, 2024 and December 31, 2023, the actual durations of the Company's available for sale securities were significantly shorter than the stated maturities.
As of September 30, 2024, the Company held marketable equity securities with a fair value of $2.1 million and an amortized cost of $2.2 million. At December 31, 2023, the Company held marketable equity securities with a fair value of $2.1 million and an amortized cost of $2.2 million. These securities represent an investment in mutual funds that have an objective to make investments for Community Reinvestment Act ("CRA") purposes.
16
The following tables provide information regarding available for sale securities and held to maturity securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2024 and December 31, 2023:
Length of Time in Continuous Unrealized Loss Position
Less Than 12 Months 12 Months or More Total
Fair Value Unrealized
Loss 		Percent
Decline from
Amortized Cost 		Fair Value Unrealized
Loss 		Percent
Decline from
Amortized Cost 		Fair Value Unrealized
Loss 		Percent
Decline from
Amortized Cost
(Dollars in thousands)
September 30, 2024
U.S. Government and agency obligations $ - $ - - % $ 83,369 $ (3,253) 3.75 % $ 83,369 $ (3,253) 3.75 %
Corporate bonds - - - 15,467 (1,533) 9.02 15,467 (1,533) 9.02
State agency and municipal obligations 3,319 (10) 0.29 3,978 (677) 14.55 7,297 (687) 8.60
Total investment securities $ 3,319 $ (10) 0.29 % $ 102,814 $ (5,463) 27.32 % $ 106,133 $ (5,473) 4.90 %
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, 2023
U.S. Government and agency obligations $ - $ - - % $ 85,243 $ (5,173) 5.72 % $ 85,243 $ (5,173) 5.72 %
Corporate bonds - - - 14,510 (2,490) 14.65 14,510 (2,490) 14.65
State agency and municipal obligations - - - 4,076 (631) 13.41 4,076 (631) 13.41
Total investment securities $ - $ - - % $ 103,829 $ (8,294) 7.40 % $ 103,829 $ (8,294) 7.40 %
There were thirty-five and thirty-four available for sale securities or held to maturity securities as of September 30, 2024 and December 31, 2023, respectively, in which the fair value of the security was less than the amortized cost of the security.
The U.S. Government and agency obligations owned are either direct obligations of the U.S. Government or guaranteed by the U.S. Government. Therefore, the contractual cash flows are guaranteed and as a result the unrealized losses in this portfolio are considered to be only temporarily impaired.
The corporate bonds are investments in subordinated debt of federally insured banks, the majority of which are callable after five years of origination. The Company monitors its corporate bond, state agency and municipal bond portfolios and considers them to have minimal default risk.
The Company has the intent and ability to retain its investment securities in an unrealized loss position at September 30, 2024 until the decline in value has recovered or the security has matured.
17
3. Loans Receivable and ACL-Loans
The following table sets forth a summary of the loan portfolio at September 30, 2024 and December 31, 2023:
(In thousands) September 30, 2024 December 31, 2023
Real estate loans:
Residential $ 45,553 $ 50,931
Commercial 1,887,942 1,947,648
Construction 160,292 183,414
2,093,787 2,181,993
Commercial business 490,292 500,569
Consumer 39,126 36,045
Total loans 2,623,205 2,718,607
ACL-Loans (27,752) (27,946)
Deferred loan origination fees, net (3,902) (5,360)
Loans receivable, net $ 2,591,551 $ 2,685,301
Lending activities primarily consist of commercial real estate loans, commercial business loans and, to a lesser degree, consumer loans. Loans may also be granted for the construction of commercial properties. The majority of commercial mortgage loans are collateralized by first or second mortgages on real estate.
Risk management
The Company has established credit policies applicable to each type of lending activity in which it engages. The Company evaluates the creditworthiness of each client and extends credit of up to 80% of the market value of the collateral, (85% maximum for owner occupied commercial real estate), depending on the client's creditworthiness and the type of collateral. The client'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 client's ability to generate continuing cash flows. The Company does not provide first or second lien residential mortgage loans secured by residential properties but has a small legacy portfolio which continues to amortize, pay off due to the sale of the collateral, or refinance away from the Company.
18
Credit quality of loans and the Allowance for Credit Losses - Loans (ACL-Loans)
Management segregates the loan portfolio into defined segments, which are used to develop and document a systematic method for determining the Company's ACL-Loans. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate.
The Company's loan portfolio is segregated into the following portfolio segments:
Residential Real Estate:This portfolio segment consists of first mortgage loans secured by one-to-four family owner occupied residential properties for personal use located in the Company's market area. This segment also includes home equity loans and home equity lines of credit secured by owner occupied one-to-four family residential properties. Loans of this type were written at a combined maximum of 80% of the appraised value of the property and the Company requires a first or second lien position on the property. These loans can be affected by economic conditions and the values of the underlying properties.
Commercial Real Estate:This portfolio segment includes loans secured by commercial real estate, multi-family dwellings, owner-occupied commercial real estate and investor-owned one-to-four family dwellings. Loans secured by commercial real estate generally have larger loan balances and more credit risk than owner occupied one-to-four family mortgage loans.
Construction:This portfolio segment includes commercial construction loans for commercial development projects, including apartment buildings and condominiums, as well as office buildings, retail and other income producing properties and land loans, which are loans made with land as collateral. Construction and land development financing generally involves greater credit risk than long-term financing on improved, owner-occupied or leased real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, the Company may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the client 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 clients to be unable to continue paying debt service, which exposes the Company to greater risk of non-payment and loss.
Commercial Business:This portfolio segment includes commercial business loans secured by assignments of corporate assets and personal guarantees of the business owners. Commercial business loans generally have higher interest rates and shorter terms than other loans, and their repayment generally depends on the successful operation of the client's business.
Consumer:This portfolio segment includes loans secured by savings or certificate accounts, as well as unsecured personal loans and overdraft lines of credit. In addition, there are loans to finance insurance premiums, secured primarily by the cash surrender value of life insurance and marketable securities.
19
ACL-Loans
The following tables set forth the activity in the Company's ACL-Loans for the three and nine months ended September 30, 2024 and 2023, by portfolio segment:
Residential Real Estate Commercial Real Estate Construction Commercial Business Consumer Total
(In thousands)
Three Months Ended September 30, 2024
Beginning balance $ 123 $ 22,473 $ 2,272 $ 10,647 $ 568 $ 36,083
Charge-offs - (8,184) (616) (7,010) (17) (15,827)
Recoveries - 1,013 - (34) 1 980
(Credit) provision for credit losses (21) 6,676 (51) (83) (5) 6,516
Ending balance $ 102 $ 21,978 $ 1,605 $ 3,520 $ 547 $ 27,752
Residential Real Estate Commercial Real Estate Construction Commercial Business Consumer Total
(In thousands)
Three Months Ended September 30, 2023
Beginning balance $ 190 $ 19,948 $ 1,798 $ 6,788 $ 1,970 $ 30,694
Charge-offs - - - - (32) (32)
Recoveries - - - 35 20 55
(Credit) provision for credit losses (29) 788 (183) (639) (1,370) (1,433)
Ending balance $ 161 $ 20,736 $ 1,615 $ 6,184 $ 588 $ 29,284
Residential Real Estate Commercial Real Estate Construction Commercial Business Consumer Total
(In thousands)
Nine Months Ended September 30, 2024
Beginning balance $ 149 $ 20,950 $ 1,699 $ 4,562 $ 586 $ 27,946
Charge-offs (141) (12,012) (616) (7,207) (78) (20,054)
Recoveries 141 1,126 - (7) 18 1,278
(Credit) provision for credit losses (47) 11,914 522 6,172 21 18,582
Ending balance $ 102 $ 21,978 $ 1,605 $ 3,520 $ 547 $ 27,752
Residential Real Estate Commercial Real Estate Construction Commercial Business Consumer Total
(In thousands)
Nine Months Ended September 30, 2023
Beginning balance $ 163 $ 15,597 $ 311 $ 6,214 $ 146 $ 22,431
Day1 effect of CECL 80 4,987 611 (1,125) 526 5,079
Balance as of January 1, 2023 as
adjusted for changes in accounting
principle 		243 20,584 922 5,089 672 27,510
Charge-offs - - - (439) (69) (508)
Recoveries - - - 68 35 103
(Credit) provision for credit losses (82) 152 693 1,466 (50) 2,179
Ending balance $ 161 $ 20,736 $ 1,615 $ 6,184 $ 588 $ 29,284
20
We evaluate whether a modification, extension or renewal of a loan is a current period origination in accordance with GAAP. Generally, loans up for renewal are subject to a full credit evaluation before the renewal is granted and such loans are considered current period originations for purpose of the tables below. The following tables present loans by origination and risk designation as of September 30, 2024 and December 31, 2023 (dollars in thousands):
21
Term Loans
Amortized Cost Balances by Origination Year as of September 30, 2024
2024 2023 2022 2021 2020 Prior Total
Residential Real Estate Loans
Pass $ - $ - $ - $ - $ - $ 42,042 $ 42,042
Special Mention - - - - - 135 135
Substandard - - - - - 3,610 3,610
Doubtful - - - - - - -
Total Residential Real Estate Loans $ - $ - $ - $ - $ - $ 45,787 $ 45,787
Residential Real Estate charge-off
Current period charge-offs $ - $ - $ - $ - $ - $ 141 $ 141
Commercial Real Estate Loans
Pass $ 90,005 $ 102,458 $ 703,277 $ 254,221 $ 96,133 $ 512,523 $ 1,758,617
Special Mention - 18,413 43,393 23,620 - 1,995 87,421
Substandard - - 27,081 9,636 5,488 2,710 44,915
Doubtful - - - - - 1,403 1,403
Total Commercial Real Estate Loans $ 90,005 $ 120,871 $ 773,751 $ 287,477 $ 101,621 $ 518,631 $ 1,892,356
Commercial Real Estate charge-off
Current period charge-offs $ - $ - $ - $ 523 $ 8,183 $ 3,306 $ 12,012
Construction Loans
Pass $ - $ 43,929 $ 55,829 $ 52,474 $ - $ - $ 152,232
Special Mention - - - - - - -
Substandard - - - - - 8,746 8,746
Doubtful - - - - - - -
Total Construction Loans $ - $ 43,929 $ 55,829 $ 52,474 $ - $ 8,746 $ 160,978
Construction charge-off
Current period charge-offs $ - $ - $ - $ - $ - $ 616 $ 616
Commercial Business Loans
Pass $ 99,251 $ 105,538 $ 184,833 $ 52,276 $ 5,874 $ 27,208 $ 474,980
Special Mention - 3,147 4,486 1,847 - 22 9,502
Substandard 145 392 1,915 7,144 - - 9,596
Doubtful - - - - - 65 65
Total Commercial Business Loans $ 99,396 $ 109,077 $ 191,234 $ 61,267 $ 5,874 $ 27,295 $ 494,143
Commercial Business charge-off
Current period charge-offs $ - $ - $ 7,010 $ 197 $ - $ - $ 7,207
Consumer Loans
Pass $ 536 $ 7,644 $ 30,015 $ - $ - $ 46 $ 38,241
Special Mention - - - - - - -
Substandard - - - - - - -
Doubtful - - - - - - -
Total Consumer Loans $ 536 $ 7,644 $ 30,015 $ - $ - $ 46 $ 38,241
Consumer charge-off
Current period charge-offs $ 23 $ - $ - $ 55 $ - $ - $ 78
Total Loans
Pass $ 189,792 $ 259,569 $ 973,954 $ 358,971 $ 102,007 $ 581,819 $ 2,466,112
Special Mention - 21,560 47,879 25,467 - 2,152 97,058
Substandard 145 392 28,996 16,780 5,488 15,066 66,867
Doubtful - - - - - 1,468 1,468
Total Loans $ 189,937 $ 281,521 $ 1,050,829 $ 401,218 $ 107,495 $ 600,505 $ 2,631,505
Total charge-off
Current period charge-offs $ 23 $ - $ 7,010 $ 775 $ 8,183 $ 4,063 $ 20,054
22
Term Loans
Amortized Cost Balances by Origination Year as of December 31, 2023
2023 2022 2021 2020 2019 Prior Total
Residential Real Estate Loans
Pass $ - $ - $ - $ - $ - $ 47,314 $ 47,314
Special Mention - - - - - 140 140
Substandard - - - - - 3,728 3,728
Doubtful - - - - - - -
Total Residential Real Estate Loans $ - $ - $ - $ - $ - $ 51,182 $ 51,182
Residential Real Estate charge-off
Current period charge-offs $ - $ - $ - $ - $ - $ - $ -
Commercial Real Estate Loans
Pass $ 95,881 $ 755,352 $ 310,811 $ 113,554 $ 133,996 $ 429,695 $ 1,839,289
Special Mention 12,333 35,136 13,203 - 2,035 114 62,821
Substandard 18,525 - 16,923 - - 8,121 43,569
Doubtful - - 2,116 - - 4,272 6,388
Total Commercial Real Estate Loans $ 126,739 $ 790,488 $ 343,053 $ 113,554 $ 136,031 $ 442,202 $ 1,952,067
Commercial Real Estate charge-off
Current period charge-offs $ - $ - $ 213 $ - $ - $ 611 $ 824
Construction Loans
Pass $ 39,627 $ 67,788 $ 41,156 $ 26,156 $ - $ - $ 174,727
Special Mention - - - - - - -
Substandard - - - - - 9,362 9,362
Doubtful - - - - - - -
Total Construction Loans $ 39,627 $ 67,788 $ 41,156 $ 26,156 $ - $ 9,362 $ 184,089
Construction charge-off
Current period charge-offs $ - $ - $ - $ - $ - $ - $ -
Commercial Business Loans
Pass $ 121,312 $ 234,997 $ 73,805 $ 9,291 $ 6,504 $ 32,293 $ 478,202
Special Mention - 3,395 1,009 - - - 4,404
Substandard 892 8,934 7,910 - - 2,092 19,828
Doubtful - - - - - 103 103
Total Commercial Business Loans $ 122,204 $ 247,326 $ 82,724 $ 9,291 $ 6,504 $ 34,488 $ 502,537
Commercial Business charge-off
Current period charge-offs $ - $ - $ - $ - $ 440 $ - $ 440
Consumer Loans
Pass $ 10,126 $ 25,406 $ - $ - $ - $ 37 $ 35,569
Special Mention - - - - - - -
Substandard - - - - - - -
Doubtful - - - - - - -
Total Consumer Loans $ 10,126 $ 25,406 $ - $ - $ - $ 37 $ 35,569
Consumer charge-off
Current period charge-offs $ 83 $ - $ - $ - $ - $ - $ 83
Total Loans
Pass $ 266,946 $ 1,083,543 $ 425,772 $ 149,001 $ 140,500 $ 509,339 $ 2,575,101
Special Mention 12,333 38,531 14,212 - 2,035 254 67,365
Substandard 19,417 8,934 24,833 - - 23,303 76,487
Doubtful - - 2,116 - - 4,375 6,491
Total Loans $ 298,696 $ 1,131,008 $ 466,933 $ 149,001 $ 142,535 $ 537,271 $ 2,725,444
Total charge-off
Current period charge-offs $ 83 $ - $ 213 $ - $ 440 $ 611 $ 1,347
23
Loans evaluated for impairment and the related ACL-Loans as of September 30, 2024 and December 31, 2023 were as follows:
Portfolio ACL-Loans
(In thousands)
September 30, 2024
Loans individually evaluated for impairment:
Residential real estate $ 3,593 $ -
Commercial real estate 46,360 -
Construction 8,766 -
Commercial business 9,595 3
Consumer 26,697 -
Subtotal 95,011 3
Loans collectively evaluated for impairment:
Residential real estate 41,960 102
Commercial real estate 1,841,582 21,978
Construction 151,526 1,605
Commercial business 480,697 3,517
Consumer 12,429 547
Subtotal 2,528,194 27,749
Total $ 2,623,205 $ 27,752
Portfolio ACL-Loans
(In thousands)
December 31, 2023
Loans individually evaluated for impairment:
Residential real estate $ 3,711 $ -
Commercial real estate 49,935 955
Construction 9,382 -
Commercial business 19,848 -
Consumer 22,129 -
Subtotal 105,005 955
Loans collectively evaluated for impairment:
Residential real estate 47,220 149
Commercial real estate 1,897,713 19,995
Construction 174,032 1,699
Commercial business 480,721 4,562
Consumer 13,916 586
Subtotal 2,613,602 26,991
Total $ 2,718,607 $ 27,946
Credit quality indicators
To measure credit risk for the loan portfolios, the Company employs a credit risk rating system. This risk rating represents an assessed level of a loan's risk based on the character and creditworthiness of the borrower/guarantor, the capacity of the borrower to adequately service the debt, any credit enhancements or additional sources of repayment, and the quality, value and coverage of the collateral, if any.
24
The objectives of the Company's risk rating system are to provide the Board of Directors and senior management with an objective assessment of the overall quality of the loan portfolio, to promptly and accurately identify loans with well-defined credit weaknesses so that timely action can be taken to minimize a potential credit loss, to identify relevant trends affecting the collectability of the loan portfolio, to isolate potential problem areas and to provide essential information for determining the adequacy of the ACL-Loans. The Company's credit risk rating system has nine grades, with each grade corresponding to a progressively greater risk of default or non-payment. Risk ratings of (1) through (5) are "pass" categories and risk ratings of (6) through (9) are criticized asset categories as defined by the regulatory agencies.
A "special mention" (6) loan 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 have a well-defined weakness or weaknesses that jeopardize the full repayment of the debt. A loan rated "doubtful" (8) has all the weaknesses inherent in a substandard loan and which, in addition, make collection or liquidation in full highly questionable and improbable when considering existing facts, conditions, and values. Loans classified as "loss" (9) are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value; rather, it is not practical or desirable to defer writing-off this asset even though partial recovery may be made in the future.
Risk ratings are assigned as necessary to differentiate risk within the portfolio. They are reviewed on an ongoing basis through the annual loan review process performed by Company personnel, normal renewal activity, monthly delinquency monitoring, and the quarterly watchlist and watched asset report process. They are revised to reflect changes in the borrower's financial condition and outlook, debt service coverage capability, repayment performance, collateral value and coverage, as well as other considerations. In addition to internal review at multiple points, outsourced loan review opines on risk ratings with regard to the sample of loans their review covers.
The following tables present credit risk ratings by loan segment as of September 30, 2024 and December 31, 2023:
Commercial Credit Quality Indicators
September 30, 2024 December 31, 2023
Commercial Real Estate Construction Commercial Business Total Commercial Real Estate Construction Commercial Business Total
(In thousands)
Pass $ 1,754,446 $ 151,526 $ 471,252 $ 2,377,224 $ 1,835,136 $ 174,032 $ 476,358 $ 2,485,526
Special Mention 87,136 - 9,445 96,581 62,577 - 4,362 66,939
Substandard 44,955 8,766 9,530 63,251 43,542 9,382 19,745 72,669
Doubtful 1,405 - 65 1,470 6,393 - 104 6,497
Loss - - - - - - - -
Total loans $ 1,887,942 $ 160,292 $ 490,292 $ 2,538,526 $ 1,947,648 $ 183,414 $ 500,569 $ 2,631,631
Residential and Consumer Credit Quality Indicators
September 30, 2024 December 31, 2023
Residential Real Estate Consumer Total Residential Real Estate Consumer Total
(In thousands)
Pass $ 41,828 $ 39,126 $ 80,954 $ 47,082 $ 36,045 $ 83,127
Special Mention 133 - 133 138 - 138
Substandard 3,592 - 3,592 3,711 - 3,711
Doubtful - - - - - -
Loss - - - - - -
Total loans $ 45,553 $ 39,126 $ 84,679 $ 50,931 $ 36,045 $ 86,976
25
Loan portfolio aging analysis
When a loan is 15 days past due, the Company sends the borrower a late notice. The Company attempts to contact the borrower by phone if the delinquency is not corrected promptly after the notice has been sent. When the loan is 30 days past due, the Company mails the borrower a letter reminding the borrower of the delinquency and attempts to contact the borrower personally to determine the reason for the delinquency and ensure the borrower understands the terms of the loan. If necessary, after the 90th day of delinquency, the Company may take other appropriate legal action. A summary report of all loans 30 days or more past due is provided to the Board of Directors of the Company periodically. Loans greater than 90 days past due are generally put on nonaccrual status. A nonaccrual loan is restored to accrual status when it is no longer delinquent and collectability of interest and principal is no longer in doubt. A loan is considered to be no longer delinquent when timely payments are made for a period of at least six months (one year for loans providing for quarterly or semi-annual payments) by the borrower in accordance with the contractual terms.
The following tables set forth certain information with respect to the Company's loan portfolio delinquencies by portfolio segment as of September 30, 2024 and December 31, 2023:
September 30, 2024
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 $ 705 $ - $ 1,172 $ 1,877 $ 43,676 $ 45,553
Commercial real estate 5,061 9,474 28,489 43,024 1,844,918 1,887,942
Construction - - 8,766 8,766 151,526 160,292
Commercial business 523 853 9,897 11,273 479,019 490,292
Consumer - - - - 39,126 39,126
Total loans $ 6,289 $ 10,327 $ 48,324 $ 64,940 $ 2,558,265 $ 2,623,205
December 31, 2023
30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Past Due Total Past Due Current Total Loans
(In thousands)
Real estate loans:
Residential real estate $ - $ 1,220 $ 132 $ 1,352 $ 49,579 $ 50,931
Commercial real estate 195 282 1,851 2,328 1,945,320 1,947,648
Construction - - 9,382 9,382 174,032 183,414
Commercial business 6,568 1,648 - 8,216 492,353 500,569
Consumer - - - - 36,045 36,045
Total loans $ 6,763 $ 3,150 $ 11,365 $ 21,278 $ 2,697,329 $ 2,718,607
There was one loan greater than 90 days delinquent and still accruing interest as of September 30, 2024. This loan has a balance of $2.0 million and is related to a maturity administrative extension. There were no loans delinquent greater than 90 days and still accruing interest as of December 31, 2023.
26
Loans on nonaccrual status
The following is a summary of nonaccrual loans by portfolio segment as of September 30, 2024 and December 31, 2023:
September 30, 2024 December 31, 2023
(In thousands)
Residential real estate $ 1,316 $ 1,386
Commercial real estate 46,360 23,009
Commercial business 9,101 15,430
Construction 8,766 9,382
Consumer - -
Total $ 65,543 $ 49,207
Interest income on loans that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms for the nine months ended September 30, 2024 and 2023 was $3.0 million and $5.1 million, respectively. There was no interest income recognized on these loans for the nine months ended September 30, 2024 and 2023.
At September 30, 2024 and December 31, 2023, there were no commitments to lend additional funds to any borrower on nonaccrual status. Nonaccrual loans with no specific reserve totaled $64.9 million and $48.3 million at September 30, 2024 and December 31, 2023, respectively, as these loans were deemed to be adequately collateralized.
Individually evaluated loans
An individually evaluated loan is generally one for which it is probable, based on current information, that the Company will not collect all the amounts due in accordance with the contractual terms of the loan. Individually evaluated loans are individually evaluated for impairment. When the Company classifies a problem loan as impaired, it evaluates whether a specific valuation allowance is required for that portion of the asset that is estimated to be impaired.
The Company also individually evaluated all insurance premium loans within the Consumer portfolio segment, irrespective of credit risk ratings.
27
The following table summarizes individually evaluated loans by portfolio segment as of September 30, 2024 and December 31, 2023.
Carrying Amount Unpaid Principal Balance Associated ACL-Loans
September 30, 2024 December 31, 2023 September 30, 2024 December 31, 2023 September 30, 2024 December 31, 2023
(In thousands)
Individually evaluated loans without a valuation allowance:
Residential real estate $ 3,593 $ 3,711 $ 3,896 $ 4,022 $ - $ -
Commercial real estate 46,360 43,942 56,338 45,032 - -
Construction 8,766 9,382 9,382 9,382 - -
Commercial business 8,985 19,848 17,196 20,502 - -
Consumer 26,697 22,129 26,697 22,129 - -
Total individually evaluated loans without a valuation allowance 94,401 99,012 113,509 101,067 - -
Individually evaluated loans with a valuation allowance:
Residential real estate $ - $ - $ - $ - $ - $ -
Commercial real estate - 5,993 - 6,017 - 955
Construction - - - - - -
Commercial business 610 - 694 - 3 -
Consumer - - - - - -
Total individually evaluated loans with a valuation allowance 610 5,993 694 6,017 3 955
Total individually evaluated loans $ 95,011 $ 105,005 $ 114,203 $ 107,084 $ 3 $ 955
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The following table summarizes the average carrying amount of individually evaluated loans and interest income recognized on individually evaluated loans by portfolio segment for the three and nine months ended September 30, 2024 and 2023:
Average Carrying Amount Interest Income Recognized
Three Months Ended September 30, Three Months Ended September 30,
2024 2023 2024 2023
(In thousands)
Individually evaluated loans without a valuation allowance:
Residential real estate $ 3,606 $ 3,760 $ 52 $ 28
Commercial real estate 52,072 1,900 287 -
Commercial business 13,703 6,387 128 48
Construction 9,176 9,382 - -
Consumer 26,477 8,981 363 -
Total individually evaluated loans without a valuation allowance 105,034 30,410 830 76
Individually evaluated loans with a valuation allowance:
Residential real estate $ - $ - $ - $ -
Commercial real estate - 21,934 - 87
Construction - - - -
Commercial business 629 3,092 11 -
Consumer - - - -
Total individually evaluated loans with a valuation allowance 629 25,026 11 87
Total individually evaluated loans $ 105,663 $ 55,436 $ 841 $ 163
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Average Carrying Amount Interest Income Recognized
Nine Months Ended September 30, Nine Months Ended September 30,
2024 2023 2024 2023
(In thousands)
Individually evaluated loans without a valuation allowance:
Residential real estate $ 3,640 $ 3,798 $ 142 $ 68
Commercial real estate 54,621 1,908 1,674 -
Commercial business 15,280 5,068 1,615 132
Construction 9,313 9,382 - -
Consumer 26,052 7,144 1,050 -
Total individually evaluated loans without a valuation allowance 108,906 27,300 4,481 200
Individually evaluated loans with a valuation allowance:
Residential real estate $ - $ - $ - $ -
Commercial real estate - 21,996 - 260
Commercial business 647 1,470 38 -
Construction - - - -
Consumer - - - -
Total individually evaluated loans with a valuation allowance 647 23,466 38 260
Total individually evaluated loans $ 109,553 $ 50,766 $ 4,519 $ 460
Loan Modifications
A loan will be considered modified as defined by ASU 2022-02 when both of the following conditions are met: 1) the borrower is experiencing financial difficulties and 2) the modification constitutes a direct change in contractual cash flows for a significant period of time. Modified terms are dependent upon the financial position and needs of the individual borrower.
There were nonew loan modifications reportable under ASU 2022-02 at September 30, 2024 and December 31, 2023.
Allowance for credit losses (ACL)-Unfunded Commitments
The Company has recorded ACL-Unfunded Commitments in Accrued expenses and other liabilities, with the provision recorded within the Provision for credit losses on the Company's Consolidated Statements of Income. The following table presents a roll forward of the ACL-Unfunded Commitments for the three and nine months ended September 30, 2024 and September 30, 2023:
Three Months Ended September 30, Nine Months Ended September 30,
2024 2023 2024 2023
(In thousands)
Balance at beginning of period $ 726 $ 1,066 $ 926 $ 80
Reversal of prior unfunded reserve - - - (80)
Day 1 effect of CECL - - - 1,273
Credit for credit losses (unfunded commitments) (220) (146) (420) (353)
Balance at end of period $ 506 $ 920 $ 506 $ 920
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Components of Provision for Credit Losses
The following table summarizes the Provision for credit losses for the three and nine months ended September 30, 2024 and September 30, 2023:
Three Months Ended September 30, Nine Months Ended September 30,
2024 2023 2024 2023
(In thousands)
Provision (credit) for credit losses (loans) $ 6,516 $ (1,433) $ 18,582 $ 2,179
Credit for credit losses (unfunded commitments) (220) (146) (420) (353)
Provision (credit) provision for credit losses $ 6,296 $ (1,579) $ 18,162 $ 1,826
4. Shareholders' Equity
Common Stock
The Company has 10,000,000 shares authorized and 7,858,573 shares issued and outstanding at September 30, 2024 and 10,000,000 shares authorized and 7,882,616 shares issued and outstanding at December 31, 2023. The Company's stock is traded on the Nasdaq Global Market under the ticker symbol BWFG.
Dividends
The Company's shareholders are entitled to dividends when and if declared by the Board of Directors out of funds legally available. The ability of the Company to pay dividends depends, in part, on the ability of the Bank to pay dividends to the Parent Corporation. 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 ("Prior Plan") of up to 400,000 shares of the Company's common Stock and, on October 27, 2021, the Company' Board of Directors authorized the repurchase of an additional 200,000 shares under the Prior Plan. During the nine months ended September 30, 2024, the Company purchased 85,990 shares of its common stock at a weighted average price of $24.82. During the year ended December 31, 2023, the Company had no purchases of common stock. To date, the Company has purchased 535,802 shares of the Company's common stock pursuant to the Prior Plan.
On October 28, 2024, the Company announced that on October 23, 2024, its Board of Directors authorized a share repurchase plan ("New Plan"). Under the terms of the New Plan, the Company is authorized to buy back up to 250,000 shares of its outstanding common stock. In connection with the authorization of the New Plan, the Company terminated the Prior Plan.
The Company intends to accomplish the share repurchases under the New Plan through open market transactions, although 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 (such as 10b-18 and 10b5-1 rules under the Securities Exchange Act of 1934) and other factors. The New Plan does not obligate the Company to acquire any particular amount of common stock, and it may be modified or suspended at any time at the Company's discretion. The Company expects to fund any repurchases from cash on hand.
5. Comprehensive Income
Comprehensive income represents the sum of net income and items of other comprehensive income or loss, including net unrealized gains or losses on securities available for sale and net unrealized gains or losses on derivatives. The Company's derivative instruments are utilized to manage economic risks, including interest rate risk. Changes in fair value of the Company's cash flow swap derivatives are primarily driven by changes in interest rates and recognized in other comprehensive income. The Company's total comprehensive income or loss for the three and nine months ended September 30, 2024 and September 30, 2023 is reported in the Consolidated Statements of Comprehensive Income.
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The following tables present the changes in accumulated other comprehensive (loss) income by component, net of tax for the three and nine months ended September 30, 2024 and September 30, 2023:
Net Unrealized Gain (Loss) on Available for Sale Securities Net Unrealized Gain (Loss) on Interest Rate Swaps Total
(In thousands)
Balance at June 30, 2024 $ (5,622) $ 3,666 $ (1,956)
Other comprehensive income (loss) before reclassifications, net of tax 2,050 (1,338) 712
Amounts reclassified from accumulated other comprehensive income, net of tax - (516) (516)
Net other comprehensive income (loss) 2,050 (1,854) 196
Balance at September 30, 2024 $ (3,572) $ 1,812 $ (1,760)
Net Unrealized Gain (Loss) on Available for Sale Securities Net Unrealized Gain (Loss) on Interest Rate Swaps Total
(In thousands)
Balance at June 30, 2023 $ (7,611) $ 5,895 $ (1,716)
Other comprehensive (loss) income before reclassifications, net of tax (579) 1,718 1,139
Amounts reclassified from accumulated other comprehensive income, net of tax - (947) (947)
Net other comprehensive (loss) income (579) 771 192
Balance at September 30, 2023 $ (8,190) $ 6,666 $ (1,524)
Net Unrealized Gain (Loss) on Available for Sale Securities Net Unrealized Gain (Loss) on Interest Rate Swaps Total
(In thousands)
Balance at December 31, 2023 $ (5,810) $ 4,146 $ (1,664)
Other comprehensive income (loss) before reclassifications, net of tax 2,238 357 2,595
Amounts reclassified from accumulated other comprehensive income, net of tax - (2,691) (2,691)
Net other comprehensive income (loss) 2,238 (2,334) (96)
Balance at September 30, 2024 $ (3,572) $ 1,812 $ (1,760)
Net Unrealized Gain (Loss) on Available for Sale Securities Net Unrealized Gain (Loss) on Interest Rate Swaps Total
(In thousands)
Balance at December 31, 2022 $ (6,750) $ 6,561 $ (189)
Other comprehensive (loss) income before reclassifications, net of tax (1,440) 1,696 256
Amounts reclassified from accumulated other comprehensive income, net of tax - (1,591) (1,591)
Net other comprehensive (loss) income (1,440) 105 (1,335)
Balance at September 30, 2023 $ (8,190) $ 6,666 $ (1,524)
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The following table provides information for the items reclassified from accumulated other comprehensive income or loss:
Accumulated Other Comprehensive Income Components Three Months Ended September 30, Nine Months Ended September 30, Associated Line Item in the Consolidated Statements of Income
2024 2023 2024 2023
(In thousands)
Derivatives:
Unrealized gains (losses) on derivatives $ 1,087 $ 1,229 $ 3,601 $ 3,323 Interest expense on borrowings
Tax (expense) benefit (257) (282) (908) (1,732) Income tax expense
Net of tax $ 830 $ 947 $ 2,693 $ 1,591
6. Earnings per share ("EPS")
Unvested restricted stock awards that contain non-forfeitable rights to dividends are participating securities and are included in the computation of EPS pursuant to the two-class method. The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. The Company's unvested restricted stock awards qualify as participating securities.
Net income is allocated between the common stock and participating securities pursuant to the two-class method. Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period, excluding participating unvested restricted stock awards.
Diluted EPS is computed in a similar manner, except that the denominator includes the number of additional common shares that would have been outstanding if potentially dilutive common shares were issued using the treasury stock method.
The following table is a reconciliation of earnings available to common shareholders and basic weighted average common shares outstanding to diluted weighted average common shares outstanding, reflecting the application of the two-class method:
Three Months Ended September 30, Nine Months Ended September 30,
2024 2023 2024 2023
(In thousands, except per share data)
Net income $ 1,926 $ 9,777 $ 6,807 $ 28,139
Dividends to participating securities(1)
(38) (41) (117) (125)
Undistributed earnings allocated to participating securities(1)
(9) (209) (53) (613)
Net income for earnings per share calculation $ 1,879 $ 9,527 $ 6,637 $ 27,401
Weighted average shares outstanding, basic 7,715 7,598 7,709 7,582
Effect of dilutive equity-based awards(2)
6 36 22 65
Weighted average shares outstanding, diluted 7,721 7,634 7,731 7,647
Net earnings per common share:
Basic earnings per common share $ 0.24 $ 1.25 $ 0.86 $ 3.61
Diluted earnings per common share $ 0.24 $ 1.25 $ 0.86 $ 3.58
(1) Represents dividends paid and undistributed earnings allocated to unvested stock-based awards that contain non-forfeitable rights to dividends.
(2) Represents the effect of the assumed exercise of stock options and the vesting of restricted shares, as applicable, utilizing the treasury stock method.
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7. Regulatory Matters
The Federal Reserve, the FDIC and the other federal and state bank regulatory agencies establish regulatory capital guidelines for U.S. banking organizations.
Under the current guidelines, banking organizations must have a minimum total risk-based capital ratio of 8.0%, a minimum Tier 1 risk-based capital ratio of 6.0%, a minimum Common Equity Tier 1 risk-based capital ratio of 4.5%, and a minimum leverage ratio of 4.0% in order to be "adequately capitalized." In addition to these requirements, banking organizations must maintain a capital conservation buffer consisting of common equity in an amount above the minimum risk-based capital requirements for "adequately capitalized" institutions equal to 2.5% of total risk-weighted assets, resulting in a requirement for the Bank to effectively maintain Common Equity Tier 1, Tier 1 and total capital ratios of 7.0%, 8.5% and 10.5%, respectively. The Bank must maintain the capital conservation buffer to avoid restrictions on the ability to pay dividends, pay discretionary bonuses, or to engage in share repurchases.
As of June 30, 2023, the Company no longer met the definition of a Small Bank Holding Company as the Company's assets exceeded $3 billion. Effective March 31, 2024, the Company is subject to the larger company capital requirements as set forth in the Economic Growth Act.
Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements.
As of September 30, 2024, the Bank and Company met all capital adequacy requirements to which they are subject. There are no conditions or events since then that management believes have changed this conclusion.
The capital amounts and ratios for the Bank and the Company at September 30, 2024 and December 31, 2023 were as follows:
Minimum Regulatory Capital Required for Capital Adequacy plus Capital Conservation Buffer Minimum Regulatory Capital to be Well Capitalized Under Prompt Corrective Action Provisions
Actual Capital
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
Bankwell Bank
September 30, 2024
Common Equity Tier 1 Capital to Risk-Weighted Assets $ 323,558 11.80 % $ 192,019 7.00 % $ 178,304 6.50 %
Total Capital to Risk-Weighted Assets 351,815 12.83 % 288,029 10.50 % 274,313 10.00 %
Tier I Capital to Risk-Weighted Assets 323,558 11.80 % 233,166 8.50 % 219,451 8.00 %
Tier I Capital to Average Assets 323,558 10.24 % 126,432 4.00 % 158,040 5.00 %
Minimum Regulatory Capital Required for Capital Adequacy Minimum Regulatory Capital to be Well Capitalized Under Prompt Corrective Action Provisions
Actual Capital
Amount Ratio Amount Ratio Amount Ratio
Bankwell Financial Group, Inc.
September 30, 2024
Common Equity Tier 1 Capital to Risk-Weighted Assets $ 266,640 9.70 % $ 123,640 4.50 % $ 178,591 6.50 %
Total Capital to Risk-Weighted Assets 364,287 13.26 % 219,804 8.00 % 274,755 10.00 %
Tier I Capital to Risk-Weighted Assets 266,640 9.70 % 164,853 6.00 % 219,804 8.00 %
Tier I Capital to Average Assets 266,640 8.44 % 126,432 4.00 % 158,040 5.00 %
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Minimum Regulatory Capital Required for Capital Adequacy plus Capital Conservation Buffer Minimum Regulatory Capital to be Well Capitalized Under Prompt Corrective Action Provisions
Actual Capital
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
Bankwell Bank
December 31, 2023
Common Equity Tier 1 Capital to Risk-Weighted Assets $ 321,432 11.30 % $ 199,047 7.00 % $ 184,829 6.50 %
Total Capital to Risk-Weighted Assets 350,303 12.32 % 298,571 10.50 % 284,353 10.00 %
Tier I Capital to Risk-Weighted Assets 321,432 11.30 % 241,700 8.50 % 227,482 8.00 %
Tier I Capital to Average Assets 321,432 9.81 % 131,110 4.00 % 163,888 5.00 %
Minimum Regulatory Capital Required for Capital Adequacy Minimum Regulatory Capital to be Well Capitalized Under Prompt Corrective Action Provisions
Actual Capital
Amount Ratio Amount Ratio Amount Ratio
Bankwell Financial Group, Inc.
December 31, 2023
Common Equity Tier 1 Capital to Risk-Weighted Assets $ 264,209 9.28 % $ 128,121 4.50 % N/A N/A
Total Capital to Risk-Weighted Assets 362,285 12.72 % 227,770 8.00 % N/A N/A
Tier I Capital to Risk-Weighted Assets 264,209 9.28 % 170,828 6.00 % N/A N/A
Tier I Capital to Average Assets 264,209 8.05 % 131,232 4.00 % N/A N/A
Regulatory Restrictions on Dividends
The ability of the Company to pay dividends depends, in part, on the ability of the Bank to pay dividends to the Parent Corporation. In accordance with Connecticut statutes, regulatory approval is required to pay dividends in excess of the Bank's profits retained in the current year plus retained profits from the previous two years. The Bank is also prohibited from paying dividends that would reduce its capital ratios below minimum regulatory requirements.
Reserve Requirements on Cash
The Bank was not required to maintain a minimum reserve balance in the Federal Reserve Bank (FRB) at September 30, 2024 or December 31, 2023.
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8. Deposits
At September 30, 2024 and December 31, 2023, deposits consisted of the following:
September 30, 2024 December 31, 2023
(In thousands)
Noninterest bearing demand deposit accounts $ 295,552 $ 346,172
Interest bearing accounts:
NOW 76,413 90,829
Money market 840,234 887,352
Savings 87,212 97,331
Time certificates of deposit 1,388,760 1,315,073
Total interest bearing accounts 2,392,619 2,390,585
Total deposits $ 2,688,171 $ 2,736,757
Maturities of time certificates of deposit as of September 30, 2024 and December 31, 2023 are summarized below:
September 30, 2024 December 31, 2023
(In thousands)
2024 $ 422,837 $ 979,807
2025 946,059 318,961
2026 2,647 24
2027 969 68
2028 and thereafter 16,248 16,213
Total $ 1,388,760 $ 1,315,073
The aggregate amount of individual certificate accounts, with balances of $250,000 or more, was approximately $216.3 million at September 30, 2024 and $151.6 million at December 31, 2023.
Brokered deposits include Brokered certificates of deposits, brokered money market accounts, one-way buy Certificate of Deposit Account Registry Service ("CDARS"), and one-way buy Insured Cash Sweep Service ("ICS"). Brokered certificates of deposits totaled $730.6 million at September 30, 2024 and $860.5 million at December 31, 2023. Brokered money market accounts totaled $52.9 million at September 30, 2024 and $91.4 million at December 31, 2023. There were no certificates of deposits from national listing services, one-way buy CDARS or one-way buy ICS at September 30, 2024 or December 31, 2023.
The following table summarizes interest expense on deposits by account type for the three and nine months ended September 30, 2024 and 2023:
Three Months Ended September 30, Nine Months Ended September 30,
2024 2023 2024 2023
(In thousands)
NOW $ 44 $ 47 $ 133 $ 127
Money market 8,597 9,064 26,294 23,532
Savings 692 817 2,093 2,404
Time certificates of deposits 16,246 13,861 47,098 35,536
Total interest expense on deposits $ 25,579 $ 23,789 $ 75,618 $ 61,599
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9. Stock-Based Compensation
Equity award plans
The Company has unvested restricted stock outstanding under three equity award plans, which are collectively referred to as the "Stock Plans". The current plan under which any future issuances of equity awards will be made is the 2022 Bankwell Financial Group, Inc. Stock Plan, or the "2022 Plan". All equity awards made under the 2022 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 restricted stock. At September 30, 2024, there were 275,588 shares reserved for future issuance under the 2022 Plan.
Restricted Stock: Restricted stock provides grantees with rights to shares of common stock upon completion of a service period. Shares of unvested restricted stock are considered participating securities. Restricted stock awards generally vest over oneto five years.
The following table presents the activity for restricted stock for the nine months ended September 30, 2024:
Nine Months Ended September 30, 2024
Number of Shares Weighted Average Grant Date Fair Value
Unvested at beginning of period 254,328
(1)
$ 29.58
Granted 66,209
(2)
25.61
Vested (88,672)
(3)
26.36
Forfeited (4,262) 25.40
Unvested at end of period 227,603
(1) Includes 33,115 shares of performance based restricted stock.
(2) Includes 18,598 shares of performance based restricted stock.
(3) Includes 16,527shares of performance based restricted stock.
The total fair value of restricted stock awards vested during the nine months ended September 30, 2024 was $2.3 million.
The Company's restricted stock expense for the nine months ended September 30, 2024 and September 30, 2023 was $2.3 million and $2.0 million, respectively. At September 30, 2024, there was $6.5 million of unrecognized stock compensation expense for restricted stock, expected to be recognized over a weighted average period of 0.9 years.
Performance Based Restricted Stock: The Company has 35,186 shares of performance based restricted stock outstanding as of September 30, 2024 pursuant to the Company's Stock Plans. The awards vest over a three year service period, provided certain performance metrics are met. The share quantity that ultimately vests can range between 0% and 200%, of the number of performance shares initially granted and is dependent on the degree to which the performance metrics are met. The Company records an expense over the vesting period based on (a) the probability that the performance metric will be met and (b) the fair market value of the Company's stock at the date of the grant.
10. Derivative Instruments
The Company manages economic risks, including interest rate, liquidity, and credit risk, by managing the amount, sources, and duration of its funding along with the use of interest rate derivative financial instruments, namely interest rate swaps. The Company does not use derivatives for speculative purposes. As of September 30, 2024, the Company was a party to three cash flow swaps, designated as hedging instruments, to add stability to interest expense and to manage its exposure to the variability of the future cash flows attributable to the contractually specified interest rates. The notional amount for each swap is $25 millionand in each case, the Company has entered into pay-fixed cash flow swaps to convert rolling 90-day brokered deposits. Cash flow swaps with a positive fair value are recorded as other assets and cash flow swaps with a negative fair value are recorded as other liabilities on the Consolidated Balance Sheets.
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The Company terminated two cash flow swaps with a total notional amount of $50 million during the year ended December 31, 2022. The underlying debt associated with the terminated swaps was kept in place. The fair value of the terminated swaps totaled $131.0 thousandas of September 30, 2024. The fair value of the terminated swaps will be reclassified from other comprehensive income to interest expense on a straight-line basis over the original term of the hedging relationship.
The Company entered into one pay-fixed portfolio layer method fair value swap, designated as a hedging instrument, with a total notional amount of $150 million in the first quarter of 2023. The Company designated the fair value swap under the portfolio layer method ("PLM"). Under this method, the hedged item is designated as a hedged layer of a closed portfolio of financial loans that is anticipated to remain outstanding for the designated hedged period. Adjustments will be made to record the swap at fair value on the Consolidated Balance Sheets, with changes in fair value recognized in interest income. The carrying value of the fair value swap on the Consolidated Balance Sheets will also be adjusted through interest income, based on changes in fair value attributable to changes in the hedged risk.
The following table represents the carrying value of the portfolio layer method hedged asset and the cumulative fair value hedging adjustment included in the carrying value of the hedged asset as of September 30, 2024 and December 31, 2023:
September 30, 2024 December 31, 2023 September 30, 2024 December 31, 2023
Carrying Value of Hedged Asset Hedged Items
(In thousands)
Fixed Rate Asset (1)
$ 151,414 $ 150,915 $ 1,414 $ 915
(1) These amounts include the amortized cost basis of closed portfolios of fixed rate loans used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedged period. As of September 30, 2024, the amortized cost basis of the closed portfolio used in this hedging relationship was $548.9 million, the cumulative basis adjustments associated with this hedging relationships was $0.7 million, and the amount of the designated hedged item was $150.0 million.
As of September 30, 2024, the Company has interest rate swaps not designated as hedging instruments, to minimize interest rate risk exposure with loans to clients.
The Company accounts for all non-client related interest rate swaps as either effective cash flow or fair value swaps. 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 clients. The Company executes interest rate swaps with commercial banking clients 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 client derivatives and the offsetting derivatives are recognized directly in earnings.
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Information about derivative instruments at September 30, 2024 and December 31, 2023 is as follows:
As of September 30, 2024
Derivative Assets Derivative Liabilities
Original Notional Amount Balance Sheet Location Fair Value Original Notional Amount Balance Sheet Location Fair Value
(In thousands)
Derivatives designated as hedging instruments:
Interest rate swaps $ 75,000 Other assets $ 2,238 $ - Accrued expenses and other liabilities $ -
Fair value swap $ - Other assets $ - $ 150,000 Accrued expenses and other liabilities $ 1,416
Derivatives not designated as hedging instruments:
Interest rate swaps(1)
$ 38,500 Other assets $ 2,877 $ 38,500 Accrued expenses and other liabilities $ 2,877
(1) Represents interest rate swaps with commercial banking clients, which are offset by derivatives with a third party.
Accrued interest receivables related to interest rate swaps as of September 30, 2024 totaled $0.7 million and is excluded from the fair value presented in the table above. The fair value of interest rate swaps in a net asset position, including accrued interest, totaled $1.6 millionas of September 30, 2024.
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As of December 31, 2023
Derivative Assets Derivative Liabilities
Original Notional Amount Balance Sheet Location Fair Value Original Notional Amount Balance Sheet Location Fair Value
(In thousands)
Derivatives designated as hedging instruments:
Interest rate swaps $ 125,000 Other assets $ 5,240 $ - Accrued expenses and other liabilities $ -
Fair value swap $ - Other assets $ - $ 150,000 Accrued expenses and other liabilities $ 917
Derivatives not designated as hedging instruments:
Interest rate swaps(1)
$ 38,500 Other assets $ 3,579 $ 38,500 Accrued expenses and other liabilities $ 3,579
(1) Represents interest rate swaps with commercial banking clients, which are offset by derivatives with a third party.
Accrued interest receivables related to interest rate swaps as of December 31, 2023 totaled $0.8 million and is excluded from the fair value presented in the table above. The fair value of interest rate swaps in a net asset position, including accrued interest, totaled $6.0 million as of December 31, 2023.
The effective portion of changes in the fair value of derivatives designated as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt. The Company expects to reclassify $1.3 million to reduce interest expense during the next 12 months.
The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction. The Company does not offset derivative assets and derivative liabilities for financial statement presentation purposes.
The Company assesses the effectiveness of the fair value swap hedge with a regression analysis that compares the changes in forward curves to determine the value. The effective portion of changes in the fair value of derivatives designated as fair value hedges is recorded through interest income. The Company does not offset derivative assets and derivative liabilities for financial statement presentation purposes.
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Changes in the consolidated statements of comprehensive income (loss) related to interest rate derivatives designated as hedges of cash flows were as follows for the three and nine months ended September 30, 2024 and September 30, 2023:
Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2024 2023 2024 2023
Interest rate swaps designated as cash flow hedges:
Unrealized (loss) gain recognized in accumulated other comprehensive income before reclassifications $ (1,342) $ 2,230 $ 589 $ 3,528
Amounts reclassified from accumulated other comprehensive income (1,087) (1,229) (3,601) (3,323)
Income tax benefit (expense) on items recognized in accumulated other comprehensive income 575 (230) 678 (100)
Other comprehensive (loss) income $ (1,854) $ 771 $ (2,334) $ 105
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 table summarizes the effect of the fair value hedging relationship recognized in the consolidated statements of income for the three and nine months ended September 30, 2024 and September 30, 2023:
Three Months Ended
September 30, 		Nine Months Ended September 30,
(In thousands) 2024 2023 2024 2023
Gain (loss) on fair value hedging relationship:
Hedged asset $ 2,359 $ (1,015) $ 499 $ (1,696)
Fair value derivative designated as hedging instrument (1,942) 1,402 747 2,407
Total gain recognized in the consolidated statements of income within interest and fees on loans $ 417 $ 387 $ 1,246 $ 711
The following tables summarize gross and net information about derivative instruments that are offset in the Consolidated Balance Sheets at September 30, 2024 and December 31, 2023:
September 30, 2024
(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 $ 5,769 $ - $ 5,769 $ 1,343 $ 4,260 $ 166
(1) Includes accrued interest receivable totaling $654 thousand.
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September 30, 2024
(In thousands)
Gross Amounts Not Offset in the Consolidated Balance Sheets
Gross Amounts of Recognized Liabilities(1)
Gross Amounts Offset in the Statement of Financial Position Net Amounts of Liabilities presented in the Statement of Financial Position Financial Instruments Cash Collateral Posted Net Amount
Derivative liabilities $ 4,284 $ - $ 4,284 $ 1,343 $ - $ 2,941
(1) Includes net accrued interest receivable totaling $9 thousand.
December 31, 2023
(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 $ 9,583 $ - $ 9,583 $ - $ 8,599 $ 984
(1) Includes accrued interest receivable totaling $764 thousand.
December 31, 2023
(In thousands)
Gross Amounts Not Offset in the Consolidated Balance Sheets
Gross Amounts of Recognized Liabilities(1)
Gross Amounts Offset in the Statement of Financial Position Net Amounts of Liabilities presented in the Statement of Financial Position Financial Instruments Cash Collateral Posted Net Amount
Derivative liabilities $ 4,473 $ - $ 4,473 $ - $ - $ 4,473
(1) Includes net interest receivable totaling $23 thousand.
11. Fair Value of Financial Instruments
GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the Consolidated Balance Sheets, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparisons to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.
Management uses its best judgment in estimating the fair value of the Company's financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction. The estimated fair value amounts have been measured as of the respective period-ends, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end.
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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 September 30, 2024 and December 31, 2023 were as follows:
September 30, 2024
Carrying Value Fair Value Level 1 Level 2 Level 3
(In thousands)
Financial Assets:
Cash and due from banks $ 275,829 $ 275,829 $ 275,829 $ - $ -
Federal funds sold 15,508 15,508 15,508 - -
Marketable equity securities 2,148 2,148 2,148 - -
Available for sale securities 108,866 108,866 63,682 45,184 -
Held to maturity securities 34,886 31,615 - 30 31,585
Loans receivable, net 2,591,551 2,569,900 - - 2,569,900
Accrued interest receivable 14,714 14,714 - 14,714 -
FHLB stock 5,655 5,655 - 5,655 -
Servicing asset, net of valuation allowance 594 594 - - 594
Derivative asset 5,115 5,115 - 5,115 -
Financial Liabilities:
Noninterest bearing deposits $ 295,552 $ 295,552 $ - $ 295,552 $ -
NOW and money market 916,647 981,697 - 981,697 -
Savings 87,212 87,212 - 87,212 -
Time deposits 1,388,760 1,394,083 - - 1,394,083
Accrued interest payable 12,751 12,751 - 12,751 -
Advances from the FHLB 90,000 90,057 - - 90,057
Subordinated debentures 69,389 65,389 - - 65,389
Derivative liability 4,293 4,293 - 4,293 -
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December 31, 2023
Carrying Value Fair Value Level 1 Level 2 Level 3
(In thousands)
Financial Assets:
Cash and due from banks $ 267,521 $ 267,521 $ 267,521 $ - $ -
Federal funds sold 1,636 1,636 1,636 - -
Marketable equity securities 2,070 2,070 2,070 - -
Available for sale securities 109,736 109,736 62,514 47,222 -
Held to maturity securities 15,817 15,903 - 33 15,870
Loans receivable, net 2,685,301 2,659,667 - - 2,659,667
Accrued interest receivable 14,863 14,863 - 14,863 -
FHLB stock 5,696 5,696 - 5,696 -
Servicing asset, net of valuation allowance 869 869 - - 869
Derivative asset 8,819 8,819 - 8,819 -
Financial Liabilities:
Noninterest bearing deposits $ 346,172 $ 346,172 $ - $ 346,172 $ -
NOW and money market 978,181 978,181 - 978,181 -
Savings 97,331 97,331 - 97,331 -
Time deposits 1,315,073 1,315,233 - - 1,315,233
Accrued interest payable 14,595 14,595 - 14,595 -
Advances from the FHLB 90,000 90,012 - - 90,012
Subordinated debentures 69,205 63,060 - - 63,060
Servicing liability 4 4 - - 4
Derivative liability 4,496 4,496 - 4,496 -
The following methods and assumptions were used by management in estimating the fair value of its financial instruments:
Marketable equity securities and available for sale securities:Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. The majority of the available for sale securities are considered to be Level 2 as other observable inputs are utilized, such as quoted prices for similar securities. Level 1 investment securities include investments in U.S. Treasury notes and in marketable equity securities for which a quoted price is readily available in the market. Level 3 held to maturity securities represent private placement municipal housing authority bonds for which no quoted market price is available. The fair value for these securities is estimated using a discounted cash flow model, using discount rates ranging from 4.8% to 6.4% as of September 30, 2024 and 4.5% to 6.9% as of December 31, 2023. These securities are CRA eligible investments.
FHLB stock:The carrying value of FHLB stock approximates fair value based on the most recent redemption provisions of the FHLB.
Loans receivable:For variable rate loans which reprice frequently and have no significant change in credit risk, fair values are based on carrying values. The fair value of fixed rate loans are estimated by discounting the future cash flows using the rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value methodology includes prepayment, default and loss severity assumptions applied by type of loan. The fair value estimate of the loans includes an expected credit loss.
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
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interest rate curves. The Company also considers the creditworthiness of each counterparty for assets and the creditworthiness of the Company for liabilities.
Assets held for sale:Assets held for sale (excluding loans) consist of real estate properties that are expected to sell within a year. The assets are reported at the lower of the carrying amount or fair value less costs to sell. The fair value represents the price that would be received to sell the asset (the exit price).
Deposits:The fair value of demand deposits, regular savings and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit and other time deposits is estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities to a schedule of aggregated expected maturities on such deposits.
Borrowings and subordinated debentures:The fair value of the Company's borrowings and subordinated debentures is estimated using a discounted cash flow calculation that applies discount rates currently offered based on similar maturities. The Company also considers its own creditworthiness in determining the fair value of its borrowings and subordinated debt. Contractual cash flows for the subordinated debt are reduced based on the estimated rates of default, the severity of losses to be incurred on a default, and the rates at which the subordinated debt is expected to prepay after the call date.
Servicing asset (liability):Servicing assets and liabilities do not trade in an active, open market with readily observable prices. The Company estimates the fair value of servicing assets and liabilities using discounted cash flow models, incorporating numerous assumptions from the perspective of a market participant, including market discount rates.
Off-balance-sheet instruments:Loan commitments on which the committed interest rate is less than the current market rate are insignificant at September 30, 2024 and December 31, 2023.
12. Fair Value Measurements
The Company is required to account for certain assets at fair value on a recurring or non-recurring basis. The Company determines fair value in accordance with GAAP, which defines fair value and establishes a framework for measuring fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:
Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 - Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Significant unobservable inputs that reflect a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Valuation techniques based on unobservable inputs are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows and the selection of discount rates that may appropriately reflect market and credit risks. Changes in these judgments often have a material impact on the fair value estimates. In addition, since these estimates are as of a specific point in time they are susceptible to material near-term changes.
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Financial instruments measured at fair value on a recurring basis
The following table details the financial instruments carried at fair value on a recurring basis at September 30, 2024 and December 31, 2023, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value. The Company had no transfers into or out of Levels 1, 2 or 3 during the nine months ended September 30, 2024 and for the year ended December 31, 2023.
Fair Value
(In thousands) Level 1 Level 2 Level 3
September 30, 2024:
Marketable equity securities $ 2,148 $ - $ -
Available for sale investment securities:
U.S. Government and agency obligations 63,682 29,717 -
Corporate bonds - 15,467 -
Derivative asset - 5,115 -
Derivative liability - 4,293 -
December 31, 2023:
Marketable equity securities $ 2,070 $ - $ -
Available for sale investment securities:
U.S. Government and agency obligations 62,514 32,712 -
Corporate bonds - 14,510 -
Derivative asset - 8,819 -
Derivative liability - 4,496 -
Marketable equity securities and available for sale investment securities:The fair value of the Company's investment securities is estimated by using pricing models or quoted prices of securities with similar characteristics (i.e., matrix pricing) and is classified within Level 1 or Level 2 of the valuation hierarchy. The pricing is primarily sourced from third-party pricing services overseen by management.
Derivative assets and liabilities:The Company's derivative assets and liabilities consist of transactions as part of management's strategy to manage interest rate risk. The valuation of the Company's interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company has determined that the majority of the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy.
Financial instruments measured at fair value on a nonrecurring basis
Certain assets and liabilities are measured at fair value on a non-recurring basis in accordance with GAAP. These include assets that are measured at the lower-of-cost-or-market that were recognized at fair value below cost at the end of the period as well as assets that are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.
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The following table details the financial instruments measured at fair value on a nonrecurring basis at September 30, 2024 and December 31, 2023, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:
Fair Value
(In thousands) Level 1 Level 2 Level 3
September 30, 2024:
Individually evaluated loans $ - $ - $ 95,008
Servicing asset, net - - 594
December 31, 2023:
Individually evaluated loans $ - $ - $ 104,050
Servicing asset, net - - 865
The following table presents information about quantitative inputs and assumptions for Level 3 financial instruments carried at fair value on a nonrecurring basis at September 30, 2024 and December 31, 2023:
Fair Value Valuation Methodology Unobservable Input Range
(Dollars in thousands)
September 30, 2024:
Individually evaluated loans $ 57,794 Appraisals Discount to appraised value
0.04% - 8.00%
26,697 Appraisals, cash surrender value life insurance, securities, cash held as collateral Discounts to appraised value and securities value
0.00% - 8.00%
10,517 Discounted cash flows Discount rate
3.38 - 10.25%
$ 95,008
Servicing asset, net $ 594 Discounted cash flows Discount rate
10.00%
Prepayment rate
3.00 - 17.00%
December 31, 2023:
Individually evaluated loans $ 31,527 Appraisals Discount to appraised value
8.00%
22,129 Appraisals, cash surrender value life insurance, securities, cash held as collateral Discounts to appraised value and securities value
0.00% - 8.00%
50,394 Discounted cash flows Discount rate
3.38 - 10.75%
$ 104,050
Servicing asset, net $ 865 Discounted cash flows Discount rate
10.00%
Prepayment rate
3.00 - 17.00%
Individually evaluated 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 ACL-Loans. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. Collateral is typically valued using appraisals or other
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indications of value based on recent comparable sales of similar properties or other assumptions. Estimates of fair value based on collateral are generally based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3. For those loans where the primary source of repayment is cash flow from operations, adjustments include impairment amounts calculated based on the perceived collectability of interest payments on the basis of a discounted cash flow analysis utilizing a discount rate equivalent to the original note rate.
Servicing assets and liabilities: When loans are sold, on a servicing retained basis, servicing rights are initially recorded at fair value. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized. The fair value of servicing assets and liabilities are not measured on an ongoing basis but are subject to fair value adjustments when and if the assets or liabilities are deemed to be impaired.
13. Subordinated debentures
On October 14, 2021, the Company completed a private placement of a $35.0 million fixed-to-floating rate subordinated note (the "2021 Note") to an institutional accredited investor. The Company used the net proceeds to repay the $15.5 million principal balance of subordinated notes issued in 2015.
The 2021 Note bears interest at a fixed rate of 3.25% per year until October 14, 2026. Thereafter, the interest rate will reset quarterly at a variable rate equal to the then current three-month term SOFR plus 233 basis points. The 2021 Note has a stated maturity of October 15, 2031 and is non-callable for five years. Beginning October 15, 2026, the Company may redeem the 2021 Note, in whole or in part, at its option. The 2021 Note is not redeemable at the option of the holder. The 2021 Note has been structured to qualify for the Company as Tier 2 capital under regulatory guidelines.
On August 19, 2022, the Company entered into a Subordinated Note Purchase Agreement with certain qualified institutional buyers, pursuant to which the Company issued and sold 6.0% fixed-to-floating rate subordinated notes due 2032 (the "2022 Notes") in the aggregate principal amount of $35.0 million. The Company used the net proceeds from the sale of the 2022 Notes for general corporate purposes.
The 2022 Notes bear interest at a fixed rate of 6.0% per year until August 31, 2027. Thereafter, the interest rate will reset quarterly at a variable rate equal to the then current three-month term SOFR plus 326 basis points. The 2022 Notes have a stated maturity of September 1, 2032 and are non-callable for five years. Beginning August 19, 2027, the Company may redeem the 2022 Notes, in whole or in part, at its option. The 2022 Notes are not subject to redemption at the option of the holder. The 2022 Notes have been structured to qualify for the Company as Tier 2 capital under regulatory guidelines.
The Company incurred certain costs associated with the issuance of its subordinated debt. The Company capitalized these costs and they have been presented within subordinated debentures on the consolidated balance sheets. At September 30, 2024 and December 31, 2023, unamortized debt issuance costs were $0.6 million and $0.8 million, respectively. Debt issuance costs amortize over the expected life of the related debt. For the three months ended September 30, 2024 and 2023 the amortization expense for debt issuance costs were $62 thousand and $62 thousand, respectively, and were recognized as an increase to interest expense on borrowings within the Consolidated Statements of Income. For the nine months ended September 30, 2024 and 2023, the amortization expense for debt issuance costs were $185 thousand and $185 thousand, respectively.
The Company recognized $0.8 million and $0.8 million in interest expense related to its subordinated debt for the three-month periods ended September 30, 2024 and 2023, respectively. The Company recognized $2.4 million and $2.4 million in interest expense related to its subordinated debt for the nine-month periods ended September 30, 2024 and 2023, respectively.
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14. Subsequent Events
On October 23, 2024, the Company's Board of Directors declared a $0.20 per share cash dividend, payable on November 22, 2024 to shareholders of record on November 11, 2024.
On October 28, 2024, the Company announced that on October 23, 2024, its Board of Directors authorized a share repurchase plan. Under the terms of the share repurchase plan, the Company is authorized to buy back up to 250,000 shares of its outstanding common stock.
The Company intends to accomplish the share repurchases through open market transactions, though the Company could accomplish repurchases through other means, such as privately negotiated transactions. The timing, price and volume of repurchases will be based on market conditions, relevant securities laws (such as 10b-18 and 10b5-1 rules under the Securities Exchange Act of 1934) and other factors. The share repurchase plan does not obligate the Company to acquire any particular amount of common stock, and it may be modified or suspended at any time at the Company's discretion. The Company expects to fund any repurchases from cash on hand.
In connection with the authorization of the new plan, the Company terminated the existing plan (the "Prior Plan"), which was originally approved on December 19, 2018 and authorized the repurchase of 400,000 shares of the Company's common stock. On October 27, 2021, the Company's Board of Directors voted to increase the number of shares authorized for repurchase under the Prior Plan by 200,000 shares (for a total of 600,000 shares of the Company's common stock). To date, the Company has purchased 535,802 shares of the Company's common stock pursuant to the Prior Plan.
A $27.1 million multifamily commercial real estate loan was placed on non-performing status as of September 30, 2024. As of November 6, 2024, the Company has a signed agreement for the sale of this loan at par value. As of September 30, 2024, this loan comprises 1.03% of the 2.50% nonperforming loans as a percentage of total loans.
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Item 2. 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 unaudited interim consolidated financial statements and related notes contained elsewhere in this report on Form 10-Q. 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 Company's Form 10-K filed for the year ended December 31, 2023in 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. is a bank holding company headquartered in New Canaan, Connecticut. Through our wholly-owned subsidiary, Bankwell Bank, or the Bank, we serve small and medium-sized businesses and retail clients. We have a history of building long-term client relationships and attracting new clients through what we believe is out superior service and our ability to deliver a diverse product offering.
The following discussion and analysis presents our results of operations and financial condition on a consolidated basis. 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 deposits and salaries and related employee benefits. We measure our performance primarily through our net interest margin, efficiency ratio, ratio of ACL-Loans to total loans, return on average assets and return on average equity, among other metrics, while maintaining appropriate regulatory leverage and risk-based capital ratios.
Executive Overview
We are focused on being the banking provider of choice and to serve as an alternative to our larger competitors. We aim to do this through:
•Responsive, client-centric products and services;
•Organic growth and strategic acquisitions when market opportunities present themselves;
•Utilization of efficient and scalable infrastructure; and
•Disciplined focus on risk management.
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 measurement of the ACL-Loans, the valuation of derivative instruments, investment securities and deferred income taxes, and the evaluation of investment securities for other than temporary impairment are particularly critical and susceptible to significant near-term change.
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Earnings and Performance Overview
For the three months ended September 30, 2024, net interest income was $20.7 million, a decrease of $2.0 million or 8.7% when compared to the same period in 2023. For the nine months ended September 30, 2024, net interest income was $63.1 million, a decrease of $9.1 million or 12.7% when compared to the same period in 2023. The decrease in net interest income for the three and nine months ended September 30, 2024 was primarily attributable to an increase in interest expense partially offset by an increase in interest on loans due to higher overall loan yields.
Net income available to common shareholders was $1.9 million, or $0.24 per diluted share, and $9.8 million, or $1.25 per diluted share, for the three months ended September 30, 2024 and 2023, respectively. Net income available to common shareholders was $6.8 million, or $0.86 per diluted share, and $28.1 million, or $3.58 per diluted share, for the nine months ended September 30, 2024 and 2023, respectively. The decrease in net income for the three and nine months ended September 30, 2024 was primarily due to an increase in the provision for credit losses and an increase in interest expense. This decrease was partially offset by an increase in interest on loans due to higher overall loan yields.
Returns on average shareholders' equity and average assets for the three months ended September 30, 2024 were2.83% and 0.24%, respectively, compared to 15.19% and 1.19%, respectively, for the three months ended September 30, 2023. Returns on average shareholders' equity and average assets for the nine months ended September 30, 2024 were 3.35% and 0.29%, respectively, compared to 15.16% and 1.16%, respectively, for the nine months ended September 30, 2023.
Results of Operations
Net Interest Income
Net interest income is the difference between interest earned on loans, securities, and cash less 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 fully taxable equivalent ("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.
FTE net interest income for the three months ended September 30, 2024 and 2023 was $20.8 million and $22.7 million, respectively. FTE net interest income for the nine months ended September 30, 2024 and 2023 was $63.3 million and $72.4 million, respectively.
FTE interest income for the three months ended September 30, 2024 remained flat at $48.3 million, compared to FTE interest income for the three months ended September 30, 2023. FTE interest income for the nine months ended September 30, 2024 increased by $5.2 million, or 3.7%, to $144.4 million, compared to FTE interest income for the nine months ended September 30, 2023. This increase was due to an increase in interest and fees on loans due to higher overall loan yields.
Interest expense for the three months ended September 30, 2024 increased by $1.9 million compared to interest expense for the three months ended September 30, 2023. Interest expense for the nine months ended September 30, 2024 increased by $14.2 million compared to interest expense for the nine months ended September 30, 2023. The increase in interest expense for the three and nine months ended September 30, 2024 was driven by an increase in rates on interest bearing deposits.
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Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential
The following tables present the average balances and yields earned on interest earning assets and average balances and weighted average rates paid on our funding liabilities for the three and nine months ended September 30, 2024 and 2023.
For the Quarter Ended
September 30, 2024 September 30, 2023
Average
Balance 		Interest
Yield/
Rate (4)
Average
Balance 		Interest
Yield/
Rate (4)
Assets:
Cash and Fed funds sold $ 253,664 $ 3,205 5.03 % $ 265,115 $ 3,393 5.08 %
Securities(1)
147,431 1,390 3.78 127,229 953 3.00
Loans:
Commercial real estate 1,905,506 28,288 5.81 1,943,725 28,140 5.67
Residential real estate 47,481 736 6.20 53,966 671 4.97
Construction 156,273 3,070 7.69 209,154 3,908 7.31
Commercial business 512,507 10,783 8.23 539,185 10,394 7.54
Consumer 41,845 719 6.84 44,020 741 6.66
Total loans 2,663,612 43,596 6.40 2,790,050 43,854 6.15
Federal Home Loan Bank stock 5,655 122 8.32 5,696 115 8.13
Total earning assets 3,070,362 $ 48,313 6.16 % 3,188,090 $ 48,315 5.93 %
Other assets 90,410 78,089
Total assets $ 3,160,772 $ 3,266,179
Liabilities and shareholders' equity:
Interest bearing liabilities:
NOW $ 94,958 $ 44 0.18 % $ 102,149 $ 47 0.18 %
Money market 832,430 8,597 4.11 922,036 9,064 3.90
Savings 89,463 692 3.07 105,366 817 3.08
Time 1,347,857 16,246 4.79 1,322,074 13,861 4.16
Total interest bearing deposits 2,364,708 25,579 4.30 2,451,625 23,789 3.85
Borrowed Money 159,349 1,895 4.73 159,103 1,783 4.39
Total interest bearing liabilities 2,524,057 $ 27,474 4.33 % 2,610,728 $ 25,572 3.89 %
Noninterest bearing deposits 303,213 345,988
Other liabilities 62,602 54,136
Total liabilities 2,889,872 3,010,852
Shareholders' equity 270,900 255,327
Total liabilities and shareholders' equity $ 3,160,772 $ 3,266,179
Net interest income(2)
$ 20,839 $ 22,743
Interest rate spread 1.83 % 2.04 %
Net interest margin(3)
2.72 % 2.85 %
(1)Average balances and yields for securities are based on amortized cost.
(2)The adjustment for securities and loans taxable equivalency amounted to $122 thousand and $52 thousand for the three months ended September 30, 2024 and 2023, respectively.
(3)Annualized net interest income as a percentage of earning assets.
(4)Yields are calculated using the contractual day count convention for each respective product type.
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For the Nine Months Ended
September 30, 2024 September 30, 2023
Average
Balance 		Interest
Yield/
Rate (4)
Average
Balance 		Interest
Yield/
Rate (4)
Assets:
Cash and Fed funds sold $ 273,138 $ 10,460 5.12 % $ 281,033 $ 9,983 4.75 %
Securities(1)
139,871 3,592 3.42 128,554 2,864 2.97
Loans:
Commercial real estate 1,909,390 84,582 5.82 1,932,549 79,958 5.46
Residential real estate 48,912 2,226 6.07 56,798 1,957 4.59
Construction 158,884 8,913 7.37 194,396 10,582 7.18
Commercial business 517,880 32,097 8.14 546,329 32,073 7.74
Consumer 41,383 2,163 6.98 30,571 1,489 6.51
Total loans 2,676,449 129,981 6.38 2,760,643 126,059 6.02
Federal Home Loan Bank stock 5,670 357 8.43 5,527 308 7.46
Total earning assets 3,095,128 $ 144,390 6.13 % 3,175,757 $ 139,214 5.78 %
Other assets 92,249 66,342
Total assets $ 3,187,377 $ 3,242,099
Liabilities and shareholders' equity:
Interest bearing liabilities:
NOW $ 97,970 $ 133 0.18 % $ 97,741 $ 127 0.17 %
Money market 849,860 26,294 4.13 910,840 23,532 3.45
Savings 91,135 2,093 3.07 117,984 2,404 2.72
Time 1,319,031 47,098 4.77 1,291,124 35,536 3.68
Total interest bearing deposits 2,357,996 75,618 4.28 2,417,689 61,599 3.41
Borrowed Money 159,288 5,450 4.57 161,166 5,238 4.29
Total interest bearing liabilities 2,517,284 $ 81,068 4.30 % 2,578,855 $ 66,837 3.47 %
Noninterest bearing deposits 336,129 374,943
Other liabilities 62,631 40,192
Total liabilities 2,916,044 2,993,990
Shareholders' equity 271,333 248,109
Total liabilities and shareholders' equity $ 3,187,377 $ 3,242,099
Net interest income(2)
$ 63,322 $ 72,377
Interest rate spread 1.83 % 2.31 %
Net interest margin(3)
2.73 % 3.04 %
(1)Average balances and yields for securities are based on amortized cost.
(2)The adjustment for securities and loans taxable equivalency amounted to $239 thousand and $154 thousand for the
nine months ended September 30, 2024 and 2023, respectively.
(3)Annualized net interest income as a percentage of earning assets.
(4)Yields are calculated using the contractual day count convention for each respective product type.
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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.
Three Months Ended September 30, 2024 vs 2023
Increase (Decrease) 		Nine Months Ended September 30, 2024 vs 2023
Increase (Decrease)
(In thousands) Volume Rate Total Volume Rate Total
Interest and dividend income:
Cash and Fed funds sold $ (145) $ (42) $ (187) $ (286) $ 763 $ 477
Securities 166 273 439 266 461 727
Loans:
Commercial real estate (559) 708 149 (968) 5,593 4,625
Residential real estate (87) 152 65 (298) 567 269
Construction (1,030) 191 (839) (1,978) 310 (1,668)
Commercial business (531) 919 388 (1,713) 1,737 24
Consumer (37) 17 (20) 558 115 673
Total loans (2,244) 1,987 (257) (4,399) 8,322 3,923
Federal Home Loan Bank stock (1) 3 2 8 41 49
Total change in interest and dividend income (2,224) 2,221 (3) (4,411) 9,587 5,176
Interest expense:
Deposits:
NOW (3) 1 (2) - 5 5
Money market (911) 444 (467) (1,654) 4,416 2,762
Savings (123) (2) (125) (591) 281 (310)
Time 276 2,108 2,384 784 10,778 11,562
Total deposits (761) 2,551 1,790 (1,461) 15,480 14,019
Borrowed money 3 108 111 (62) 273 211
Total change in interest expense (758) 2,659 1,901 (1,523) 15,753 14,230
Change in net interest income $ (1,466) $ (438) $ (1,904) $ (2,888) $ (6,166) $ (9,054)
Provision (credit) for Credit Losses
The provision (credit) for credit losses is based on management's periodic assessment of the adequacy of our ACL-Loans and ACL-Unfunded Commitments which, in turn, is based on interrelated factors such as the composition of our loan portfolio and its inherent risk characteristics, the level of nonperforming loans and net charge-offs, both current and historic, local economic and credit conditions, the direction of real estate values, and regulatory guidelines. The provision (credit) for credit losses is charged against earnings in order to maintain our ACL-Loans and ACL-Unfunded Commitments and reflects management's best estimate of probable losses inherent in our loan portfolio as of the balance sheet date.
The provision for credit losses for the three months ended September 30, 2024 was $6.3 million compared to a credit for credit losses of $1.6 million for the three months ended September 30, 2023. The provision for credit losses for the nine months ended September 30, 2024 was $18.2 million compared to a provision for credit losses of $1.8 million for the nine months ended September 30, 2023. The increase in the provision for credit losses for the quarter was primarily due to a charge-off of $8.2 million. The increase was partially offset by a $1.0 million recovery on a previously charged-off loan.
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The increase in provision for credit losses for the nine months ended September 30, 2024 was primarily driven due to charge-offs of $20.1 million partially offset by recoveries of $1.3 million.
Noninterest Income
Noninterest income is a component of our revenue and is comprised primarily of fees generated from deposit relationships with our clients, fees generated from sales and referrals of loans, and income earned on bank-owned life insurance.
The following tables compare noninterest income for the three and nine months ended September 30, 2024 and 2023:
Three Months Ended
September 30, 		Change
(Dollars in thousands) 2024 2023 $ %
Gains and fees from sales of loans $ 133 $ 237 $ (104) (43.9)
Bank-owned life insurance 346 303 43 14.2
Service charges and fees 575 294 281 95.6
Other 102 (48) 150 Favorable
Total noninterest income $ 1,156 $ 786 $ 370 47.1 %
Nine Months Ended
September 30, 		Change
(Dollars in thousands) 2024 2023 $ %
Gains and fees from sales of loans $ 499 $ 1,893 $ (1,394) (73.6) %
Bank-owned life insurance 1,008 876 132 15.1
Service charges and fees 1,374 941 433 46.0
Other (127) 3 (130) Unfavorable
Total noninterest income $ 2,754 $ 3,713 $ (959) (25.8) %
Noninterest income increased by $0.4 million to $1.2 million for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Noninterest income decreased by $1.0 million to $2.8 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The increase in noninterest income was driven by an increase in service charges and fees for the three months ended 2024. The decrease in noninterest income was driven by a decrease in SBA loan sales partially offset by an increase in service charges and fees for the nine months ended 2024.
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Noninterest Expense
The following tables compare noninterest expense for the three and nine months ended September 30, 2024 and 2023:
Three Months Ended
September 30, 		Change
(Dollars in thousands) 2024 2023 $ %
Salaries and employee benefits $ 6,223 $ 6,036 $ 187 3.1 %
Occupancy and equipment 2,334 2,146 188 8.8
Professional services 1,142 491 651 132.6
Data processing 851 741 110 14.8
Director fees 292 362 (70) (19.3)
FDIC insurance 853 1,026 (173) (16.9)
Marketing 73 184 (111) (60.3)
Other 1,097 1,219 (122) (10.0)
Total noninterest expense $ 12,865 $ 12,205 $ 660 5.4 %
Nine Months Ended
September 30, 		Change
(Dollars in thousands) 2024 2023 $ %
Salaries and employee benefits $ 18,690 $ 18,507 $ 183 1.0 %
Occupancy and equipment 6,894 6,434 460 7.1
Professional services 3,196 2,505 691 27.6
Data processing 2,346 2,141 205 9.6
Director fees 1,498 1,207 291 24.1
FDIC insurance 2,488 3,138 (650) (20.7)
Marketing 277 512 (235) (45.9)
Other 3,018 3,093 (75) (2.4)
Total noninterest expense $ 38,407 $ 37,537 $ 870 2.3 %
Noninterest expense increased by $0.7 million to $12.9 million for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Noninterest expense increased by $0.9 million to $38.4 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The increase in noninterest expense was primarily driven by an increase in professional services for the three and nine months ended September 30, 2024.
Income Taxes
Income tax expense for the three months ended September 30, 2024 and 2023 totaled $0.8 million and $3.1 million, respectively. The effective tax rates for the three months ended September 30, 2024 and 2023 were 29.0% and 23.9%, respectively. Income tax expense for the nine months ended September 30, 2024 and 2023 totaled $2.5 million and $8.4 million, respectively. The effective tax rates for the nine months ended September 30, 2024 and 2023 were 26.6% and 23.1%, respectively.
Financial Condition
Summary
Assets totaled $3.2 billion at September 30, 2024 a decrease of $54.4 million or 1.7% compared to December 31, 2023. Gross loans totaled $2.6 billion at September 30, 2024, a decrease of $95.4 million or 3.5% compared to December 31, 2023. Deposits totaled $2.7 billion at September 30, 2024, a decrease of $48.6 million, or 1.8% compared to December 31, 2023.
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Shareholders' equity totaled $267.9 million as of September 30, 2024, an increase of $2.2 million compared to December 31, 2023, primarily a result of net income of $6.8 million for the nine months ended September 30, 2024. The increase was partially offset by dividends paid of $4.7 million.
Loan Portfolio
We originate commercial real estate loans, construction loans, commercial business loans and consumer loans in our market. We also pursue certain types of commercial lending opportunities outside our market, particularly where we have strong business relationships. Our loan portfolio is the largest category of our earning assets.
Total loans before deferred loan fees and the ACL-Loans were $2.6 billion at September 30, 2024 and $2.7 billion at December 31, 2023. Total gross loans decreased $95.4 million as of September 30, 2024 compared to the year ended December 31, 2023.
The following table compares the composition of our loan portfolio for the dates indicated:
(In thousands) At September 30, 2024 At December 31, 2023 Change
Real estate loans:
Residential $ 45,553 $ 50,931 $ (5,378)
Commercial 1,887,942 1,947,648 (59,706)
Construction 160,292 183,414 (23,122)
2,093,787 2,181,993 (88,206)
Commercial business 490,292 500,569 (10,277)
Consumer 39,126 36,045 3,081
Total loans $ 2,623,205 $ 2,718,607 $ (95,402)
The following table compares the composition of our commercial real estate loan portfolio by non-owner occupied and owner occupied loans at September 30, 2024 and December 31, 2023:
At September 30, 2024
At December 31, 2023
Change
Total % Total % Total
(Dollars in thousands)
Commercial real estate loans:
Non-owner occupied $ 1,204,008 63.8 % $ 1,228,126 63.1 % $ (24,118)
Owner occupied 682,734 36.2 718,780 36.9 (36,046)
Total commercial real estate loans(1)
$ 1,886,742 100.0 % $ 1,946,906 100.0 % $ (60,164)
(1) Excludes the positive fair value effect of the portfolio layer swap of $1,200 thousand and the positive fair value effect of the portfolio layer swap of $742 thousand for Commercial Real Estate at September 30, 2024 and December 31, 2023, respectively.
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The following table compares the composition of our commercial real estate loan portfolio by property type, and collateral location as of September 30, 2024:
Commercial Real Estate CT All Other NY NYC NJ FL OH PA All Other
Total(1)
(Dollars in thousands)
Residential care(2)
$ - $ 69,143 $ 40,565 $ 22,160 $ 279,919 $ 79,338 $ 23,152 $ 117,295 $ 631,572
Retail 120,457 84,590 7,406 19,436 17,078 3,474 34,463 90,757 377,661
Multifamily 172,779 31,050 51,721 7,139 - - 21,938 - 284,627
Office 61,476 10,300 2,997 25,490 2,250 - 12 63,533 166,058
Industrial / warehouse 69,564 14,203 19,735 17,116 2,738 - - 15,466 138,822
Mixed use 39,513 1,128 50,246 - - - - - 90,887
Medical office 40,708 12,324 1,425 4,126 - 4,805 3,888 18,236 85,512
1-4 family investment 12,224 14,508 1,899 2,774 17,234 - - - 48,639
All other(3)
19,832 19,938 23,194 - - - - - 62,964
$ 536,553 $ 257,184 $ 199,188 $ 98,241 $ 319,219 $ 87,617 $ 83,453 $ 305,287 $ 1,886,742
(1) Excludes the positive fair value effect of the portfolio layer swap of $1,200 thousand for Commercial Real Estate at September 30, 2024.
(2) Primarily consists of skilled nursing and assisted living facilities.
(3) Includes Special use, self storage, and land.
As of September 30, 2024, the Bank had $166.1 million of loans collateralized by offices, which represented 6.3% of the total loan portfolio. Most of the properties in this portfolio are in suburban locations. 96.7% of this portfolio was pass rated, and there were two relationships totaling $5.5 million on nonaccrual status. As of September 30, 2024, we had $284.6 million of loans collateralized by multifamily properties, which represented 10.9% of the total loan portfolio. These properties are all located in Connecticut, New York, Pennsylvania, or New Jersey, with nine properties, totaling $51.7 million, located in New York City. 78.9% of the New York City exposure is located in Brooklyn, 11.6% in Manhattan and the remaining 9.5% in Queens.
The following table presents an analysis of the commercial real estate portfolio's loan to value at origination and by property type as of September 30, 2024.
Commercial Real Estate
Total CRE Portfolio(1)
Percentage of Total CRE Portfolio Loan to Value %
(Dollars in thousands)
Property Type
Residential care(2)
$ 631,572 33.5 % 60.7 %
Retail 377,661 20.0 59.7
Multifamily 284,627 15.1 64.1
Office 166,058 8.8 59.9
Industrial / warehouse 138,822 7.4 59.6
Mixed use 90,887 4.8 60.7
Medical office 85,512 4.5 64.5
1-4 family investment 48,639 2.6 60.8
All other(3)
62,964 3.3 62.1
Total $ 1,886,742 100.0 % 61.1 %
(1) Excludes the positive fair value effect of the portfolio layer swap of $1,200 thousand for Commercial Real Estate at September 30, 2024.
(2) Primarily consists of skilled nursing and assisted living facilities.
(3) Includes Special use, self storage, and land.
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Asset Quality
We actively manage asset quality through our underwriting practices and collection operations. Our Board of Directors monitors credit risk management. The Directors Loan Committee ("DLC") has primary oversight responsibility for the credit-granting function including approval authority for credit-granting policies, review of management's credit-granting activities and approval of large exposure credit requests, as well as loan review and problem loan management and resolution. The committee reports the results of its respective oversight functions to our Board of Directors. In addition, our Board of Directors receives information concerning asset quality measurements and trends on a monthly basis. While we continue to adhere to prudent underwriting standards, our loan portfolio is not immune to potential negative consequences as a result of general economic weakness, such as a prolonged downturn in the housing market or commercial real estate market on a 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 client and extends credit of up to 80% of the market value of the collateral, (85% maximum for owner occupied commercial real estate), depending on the client's creditworthiness and the type of collateral. The client'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 client's ability to generate continuing cash flows. The Company does not provide first or second consumer mortgage loans secured by residential properties but has a small legacy portfolio which continues to amortize, pay off due to the sale of the collateral, or refinance away from the Company.
Credit risk management involves a partnership between our relationship managers and our credit approval, portfolio management, credit administration and collections departments. Disciplined underwriting, portfolio monitoring and early problem recognition are important aspects of maintaining our high credit quality standards and low levels of nonperforming assets since our inception in 2002.
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:
(In thousands) At September 30, 2024 At December 31, 2023
Nonaccrual loans:
Real estate loans:
Residential $ 1,316 $ 1,386
Commercial 46,360 23,009
Commercial business 9,101 15,430
Construction 8,766 9,382
Consumer - -
Total nonaccrual loans 65,543 49,207
Other real estate owned - -
Total nonperforming assets $ 65,543 $ 49,207
Nonperforming assets to total assets 2.07 % 1.53 %
Nonaccrual loans to total gross loans 2.50 % 1.81 %
ACL-loans as a % of total loans 1.06 % 1.03 %
ACL-loans as a % of nonperforming loans 42.34 % 56.79 %
Total past due loans to total gross loans 2.48 % 0.78 %
Nonperforming assets totaled $65.5 million and represented 2.07% of total assets at September 30, 2024, compared to $49.2 million and 1.53% of total assets at December 31, 2023. Nonaccrual loans totaled $65.5 millionat September 30, 2024 and $49.2 million at December 31, 2023. Nonaccrual loans were $56.2 million as of June 30, 2024. The increase in nonaccrual loans compared to June 30, 2024 was primarily due to a $27.1 million1commercial real estate multi-family loan that was placed on nonaccrual in the third quarter of 2024. The increase was partially offset by two loans that were partially charged-off for a total of $15.4 million and two loans that were paid off totaling $4.7 million in the third quarter of 2024.
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1.As of November 6, 2024, the Company has a signed agreement for the sale of this loan at par value. As of September 30, 2024, this loan comprises 1.03% of the 2.50% nonperforming loans as a percentage of total loans.
There was no Other Real Estate Owned ("OREO") at September 30, 2024 or December 31, 2023.
ACL-Loans
We evaluate the adequacy of the ACL-Loans based on "forward looking" expected losses. Management believes that the current ACL-Loans will be adequate to absorb credit losses on existing loans that may become uncollectible based on the evaluation of known and inherent risks in the loan portfolio. The evaluation takes into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality and specific problem loans, and current economic conditions which may affect the borrowers' ability to pay. The evaluation also details historical losses by loan segment and the resulting credit loss rates which are projected for current loan total amounts. Loss estimates for specified problem loans are also detailed. All of the factors considered in the analysis of the adequacy of the ACL-Loans may be subject to change.
We estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of our ACL-Loans is based on internally assigned risk classifications of loans, the Bank's and peer banks' historical loss experience, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates.
Our general practice is to identify problem credits early and recognize full or partial charge-offs as promptly as practicable when it is determined that it is probable that the loan will not be repaid according to its original contractual terms, including principal and interest. Full or partial charge-offs on collateral dependent individually evaluated loans are recognized when the collateral is deemed to be insufficient to support the carrying value of the loan. We do not recognize a recovery when an updated appraisal indicates a subsequent increase in value of the collateral.
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 may be recorded on the remaining loan balance based on the same criteria.
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The following table presents the activity in our ACL-Loans and related ratios for the dates indicated:
Three Months Ended
September 30, 		Nine Months Ended
September 30,
(Dollars in thousands) 2024 2023 2024 2023
Balance at beginning of period $ 36,083 $ 30,694 $ 27,946 $ 22,431
CECL Day 1 Adjustment - - - 5,079
Balance at beginning of period-Adjusted 36,083 30,694 27,946 27,510
Charge-offs:
Residential real estate - - (141) -
Commercial real estate (8,184) - (12,012) -
Commercial business (7,010) - (7,207) (439)
Consumer (17) (32) (78) (69)
Construction (616) - (616) -
Total charge-offs (15,827) (32) (20,054) (508)
Recoveries:
Residential real estate - - 141 -
Commercial real estate 1,013 - 1,126 -
Commercial business (34) 35 (7) 68
Consumer 1 20 18 35
Construction - - - -
Total recoveries 980 55 1,278 103
Net (charge-offs) recoveries (14,847) 23 (18,776) (405)
Provision (credit) for credit losses - loans 6,516 (1,433) 18,582 2,179
Balance at end of period $ 27,752 $ 29,284 $ 27,752 $ 29,284
Net charge-offs to average loans 0.56 % - % 0.70 % 0.01 %
ACL-Loans to total gross loans 1.06 % 1.06 % 1.06 % 1.06 %
At September 30, 2024, our ACL-Loans was $27.8 million and represented 1.06% of total gross loans, compared to $27.9 million, or 1.03% of total gross loans, at December 31, 2023.
The following table presents the allocation of the ACL-Loans balance and the related allocation percentage of these loans across the total loan portfolio:
At September 30, 2024 At December 31, 2023
(Dollars in thousands) ACL-Loans Amount ACL-Loan Percentage Loan Segment to Total Loans Percentage ACL-Loans ACL-Loan Percentage Loan Segment to Total Loans Percentage
Residential real estate $ 102 0.38 % 1.74 % $ 149 0.53 % 1.87 %
Commercial real estate 21,978 79.19 71.97 20,950 74.97 71.64
Construction 1,605 5.78 6.11 1,699 6.08 6.75
Commercial business 3,520 12.68 18.69 4,562 16.32 18.41
Consumer 547 1.97 1.49 586 2.10 1.33
Total ACL-Loans $ 27,752 100.00 % 100.00 % $ 27,946 100.00 % 100.00 %
The allocation of the ACL-Loans at September 30, 2024 reflects our assessment of credit risk and probable loss within each portfolio. We believe that the level of the ACL-Loans at September 30, 2024 is appropriate to cover probable losses.
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ACL- Unfunded Commitments
The ACL-Unfunded Commitments provision is based on "forward looking" losses inherent with funding the unused portion of legal commitments to lend. The reserve for unfunded credit commitments is included within other liabilities in the accompanying Consolidated Balance Sheets. Changes in the ACL-Unfunded Commitments are reported as a component of the Provision for credit losses in the accompanying Consolidated Statements of Income.
Investment Securities
At September 30, 2024, the carrying value of our investment securities portfolio totaled $145.9 million and represented 4.6% of total assets, compared to $127.6 million, or 4.0% of total assets, at December 31, 2023.
The net unrealized loss position on our investment portfolio at September 30, 2024 was $2.4 million and included gross unrealized gains of $3.0 million. The net unrealized loss position on our investment portfolio at December 31, 2023 was $7.5 million and included gross unrealized gains of $0.8 million.
Deposit Activities and Other Sources of Funds
September 30, 2024 December 31, 2023
(Dollars in thousands) Amount Percent Amount Percent
Noninterest bearing demand $ 295,552 11.00 % $ 346,172 12.65 %
NOW 76,413 2.84 90,829 3.32
Money market 840,234 31.26 887,352 32.42
Savings 87,212 3.24 97,331 3.56
Time 1,388,760 51.66 1,315,073 48.05
Total deposits $ 2,688,171 100.00 % $ 2,736,757 100.00 %
Total deposits were $2.7 billion at September 30, 2024, a decrease of $48.6 million, from the balance at December 31, 2023.
Brokered certificates of deposits totaled $730.6 million at September 30, 2024 and $860.5 million at December 31, 2023. There were no certificates of deposits from national listing services at September 30, 2024 or December 31, 2023. Brokered money market accounts totaled $52.9 million at September 30, 2024 and $91.4 million at December 31, 2023.
As of September 30, 2024, our FDIC insured deposits were $2.0 billion, or 75% of total deposits. Additionally, $116.1 million of deposits, or 4% of total deposits, are insured by standby letters of credit with the Federal Home Loan Bank of Boston.
At September 30, 2024 and December 31, 2023, time deposits with a denomination of $100 thousand or more, including CDARS and brokered deposits, totaled $1.2 billion and $1.2 billion, respectively, maturing during the periods indicated in the table below:
(Dollars in thousands) September 30, 2024 December 31, 2023
Maturing:
Within 3 months $ 378,970 $ 343,084
After 3 but within 6 months 345,715 317,534
After 6 months but within 1 year 479,694 244,472
After 1 year 19,138 294,641
Total $ 1,223,517 $ 1,199,731
We utilize advances from the Federal Home Loan Bank of Boston, or FHLB, as part of our overall funding strategy and to meet short-term liquidity needs, and to a lesser degree, manage interest rate risk arising from the difference in asset and liability maturities. Total FHLB advances were $90.0 million at September 30, 2024 and December 31, 2023, respectively.
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The Bank has additional borrowing capacity at the FHLB up to a certain percentage of the value of qualified collateral. In accordance with agreements with the FHLB, the qualified collateral must be free and clear of liens, pledges and encumbrances. At September 30, 2024, the Bank had pledged $762.8 million of eligible loans as collateral to support borrowing capacity at the FHLB of Boston. As of September 30, 2024, the Bank had immediate availability to borrow an additional $280.0 million based on qualified collateral.
At September 30, 2024, the Bank had a secured borrowing line with the FRB, a letter of credit with the FHLB, and unsecured lines of credit with Zions Bank, Pacific Coast Bankers Bank ("PCBB"), and Atlantic Community Bankers Bank ("ACBB"). The total borrowing line, letter, or line of credit and the amount outstanding at September 30, 2024is summarized below:
September 30, 2024
Total Letter or Line of Credit Total Outstanding
(Dollars in thousands)
FRB $ 739,927 $ -
FHLB 479,863 199,852
Zions Bank 45,000 -
PCBB 38,000 -
ACBB 12,000 -
Total $ 1,314,790 $ 199,852
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 Bank's liquidity positions are monitored daily by management. The Asset Liability Committee ("ALCO") establishes guidelines to ensure maintenance of prudent levels of liquidity. ALCO reports to the Company's Board of 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 Zions Bank, PCBB, and ACBB. The Bank also maintains additional collateralized borrowing capacity with the FRB and the FHLB in excess of levels used in the ordinary course of business. Our sources of liquidity include cash, unpledged investment securities, borrowings from the FRB, FHLB, lines of credit from Zions Bank, PCBB, and ACBB, the brokered deposit market and national CD listing services.
Capital Resources
Shareholders' equity totaled $267.9 million as of September 30, 2024, an increase of $2.2 million compared to December 31, 2023, primarily a result of net income of $6.8 million for the nine months ended September 30, 2024. The increase was partially offset by dividends paid of $4.7 million.
The Bank and Company are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. At September 30, 2024, the Bank met all capital adequacy requirements to which it was subject and exceeded the regulatory minimum capital levels to be considered well-capitalized under the regulatory framework for prompt corrective action. At September 30, 2024, the Bank's ratio of Common Equity Tier 1 capital to risk-weighted assets was 11.80%, total capital to risk-weighted assets was 12.83%, Tier 1 capital to risk-weighted assets was 11.80% and Tier 1 capital to average assets was 10.24%. At September 30, 2024, the Company met all capital adequacy requirements to which it was subject and exceeded the regulatory minimum capital levels to be considered well-capitalized under the regulatory framework for prompt corrective action. At September 30, 2024,
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the Company's ratio of Common Equity Tier 1 capital to risk-weighted assets was 9.70%, total capital to risk-weighted assets was 13.26%, Tier 1 capital to risk-weighted assets was 9.70% and Tier 1 capital to average assets was 8.44%.
Under the current guidelines, banking organizations must have a minimum total risk-based capital ratio of 8.0%, a minimum Tier 1 risk-based capital ratio of 6.0%, a minimum common equity Tier 1 risk-based capital ratio of 4.5%, and a minimum leverage ratio of 4.0% in order to be "adequately capitalized." In addition to these requirements, banking organizations must maintain a capital conservation buffer consisting of common Tier 1 equity in an amount above the minimum risk-based capital requirements for "adequately capitalized" institutions equal to 2.5% of total risk-weighted assets, resulting in a requirement for the Company and the Bank to effectively maintain common equity Tier 1, Tier 1 and total capital ratios of 7.0%, 8.5% and 10.5%, respectively. The Company and the Bank must maintain the capital conservation buffer to avoid restrictions on the ability to pay dividends, pay discretionary bonuses, or to engage in share repurchases.
Asset/Liability Management and Interest Rate Risk
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 baseline 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.
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 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 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 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. Per Company policy, the Bank should not be outside these limits for twelve consecutive months unless the Bank's forecasted capital ratios are considered to be "well capitalized". As of September 30, 2024, the Bank has met all minimum regulatory capital requirements to be considered "well capitalized".
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The following tables set forth the estimated percentage change in our net interest income at risk over one-year simulation periods beginning September 30, 2024 and December 31, 2023:
Parallel Ramp Estimated Percent Change in Net Interest Income
Rate Changes (basis points) September 30, 2024 December 31, 2023
-100 1.00 % 1.70 %
+200 (2.20) (3.20)
Parallel Shock Estimated Percent Change in Net Interest Income
Rate Changes (basis points) September 30, 2024 December 31, 2023
-100 0.50 % 3.60 %
+100 (1.00) (2.70)
+200 (2.10) (5.80)
+300 (2.70) (8.10)
The net interest income at risk simulation results indicate that, as of September 30, 2024, 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 term view of our interest rate risk position by capturing longer-term repricing risk and options risk embedded in the balance sheet. It measures the sensitivity of economic value of equity to changes in interest rates. The 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.
The following table sets forth the estimated percentage change in our economic value of equity at risk, assuming various shifts in interest rates:
Estimated Percent Change in Economic Value of Equity ("EVE")
Rate Changes (basis points) September 30, 2024 December 31, 2023
-100 2.50 % 2.70 %
+100 (3.30) (3.80)
+200 (7.80) (9.40)
+300 (10.80) (12.60)
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 and the composition of our balance sheet may change to a different degree than estimated. ALCO recognizes that deposit balances could shift into higher yielding alternatives as market rates change. ALCO has modeled increased costs of deposits in the rising rate simulation scenarios presented above.
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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 client 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk Management
Interest rate risk management is our primary market risk. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset/Liability Management and Interest Rate Risk" herein for a discussion of our management of our interest rate risk.
Impact of Inflation
Our financial statements and related data contained in this quarterly report have been prepared in accordance with GAAP, which requires 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. 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.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures:
The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period reported on in this report, the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiary) required to be included in the Company's periodic SEC filings.
(b) Change in internal controls:
There has been no change in the Company's internal control over financial reporting during the quarter ended September 30, 2024 that has materially affected, or is reasonably likely to affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and the Bank are periodically involved in various legal proceedings as normal incident to their businesses. In the opinion of management, no material loss is expected from any such pending lawsuit.
Item 1A. Risk Factors
There were no material changes in risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table includes information with respect to repurchases of the Company's Common Stock during the three-month period ended September 30, 2024 under the Company's share repurchase program.
Issuer Purchases of Equity Securities
Period (a) Total Number of Shares (or Units) Purchased (b) Average Price Paid per Share (or Unit) (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs(1)
July 1, 2024 - July 31, 2024 9,670 $ 23.86 9,670 64,198
August 1, 2024 - August 31, 2024 - - - 64,198
September 1, 2024 - September 30, 2024 - - - 64,198
Total 9,670 $ 23.86 9,670
(1) On December 19, 2018, the Company's Board of Directors authorized a share repurchase program ("Prior Plan") of up to 400,000 shares of the Company's Common Stock. On October 27, 2021, the Company's Board of Directors authorized the repurchase of an additional 200,000 shares under the Prior Plan. To date, the Company has purchased 535,802 shares of the Company's common stock pursuant to the Prior Plan.
On October 28, 2024, the Company announced that on October 23, 2024, its Board of Directors authorized a share repurchase plan ("New Plan"). Under the terms of the New Plan, the Company is authorized to purchase up to 250,000 shares of its outstanding common stock. In connection with the authorization of the New Plan, the Company terminated the Prior Plan.
The Company intends to accomplish the share repurchases through open market transactions, although 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 (such as 10b-18 and 10b5-1 rules under the Securities Exchange Act of 1934) and other factors. The New Plan does not obligate the Company to acquire any particular amount of common stock, and it may be modified or suspended at any time at the Company's discretion. The Company expects to fund any repurchases from cash on hand.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
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Item 6. Exhibits
The following exhibits are filed herewith:
31.1
Certification of Christopher R. Gruseke pursuant to Rule 13a-14(a)
31.2
Certification of Courtney E. Sacchetti pursuant to Rule 13a-14(a)
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Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101 The following materials from Bankwell Financial Group, Inc.'s Quarterly Report on Form 10-Q for the period ended September 30, 2023, formatted in Inline eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income (Loss); (iv) Consolidated Statements of Shareholders' Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements.
104 Cover Page Interactive Data File (formatting in Inline XBRL and contained in Exhibit 101)
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Bankwell Financial Group, Inc.
Date: November 6, 2024 /s/ Christopher R. Gruseke
Christopher R. Gruseke
President and Chief Executive Officer
Date: November 6, 2024 /s/ Courtney E. Sacchetti
Courtney E. Sacchetti
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
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