Company Quick10K Filing
Bankwell Financial Group
Price27.98 EPS2
Shares8 P/E12
MCap219 P/FCF-71
Net Debt-83 EBIT51
TEV136 TEV/EBIT3
TTM 2019-09-30, in MM, except price, ratios
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8-K 2018-01-31

BWFG 10Q Quarterly Report

Part 1 - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 bwfg03312021ex311.htm
EX-31.2 bwfg03312021ex312.htm
EX-32 bwfg03312021ex32.htm

Bankwell Financial Group Earnings 2021-03-31

Balance SheetIncome StatementCash Flow

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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 March 31, 2021

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)
Connecticut20-8251355
(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. þ Yes ¨ 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). þ Yes ¨ 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
þSmaller 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 þ No

As of April 30, 2021, there were 7,908,630 shares of the registrant’s common stock outstanding.
2


Bankwell Financial Group, Inc.
Form 10-Q

Table of Contents
Certifications
3


PART 1 – FINANCIAL INFORMATION
Item 1. Financial Statements
Bankwell Financial Group, Inc.
Consolidated Balance Sheets - (unaudited)
(In thousands, except share data)
March 31, 2021December 31, 2020
ASSETS
Cash and due from banks$351,194 $405,340 
Federal funds sold10,811 4,258 
Cash and cash equivalents362,005 409,598 
Investment securities
Marketable equity securities, at fair value2,178 2,207 
Available for sale investment securities, at fair value83,218 88,605 
Held to maturity investment securities, at amortized cost (fair values of $18,550 and $20,032 at March 31, 2021 and December 31, 2020, respectively)
16,225 16,078 
Total investment securities101,621 106,890 
Loans receivable (net of allowance for loan losses of $20,545 at March 31, 2021 and $21,009 at December 31, 2020)
1,650,127 1,601,672 
Accrued interest receivable7,306 6,579 
Federal Home Loan Bank stock, at cost6,446 7,860 
Premises and equipment, net33,386 21,762 
Bank-owned life insurance42,881 42,651 
Goodwill2,589 2,589 
Other intangible assets67 76 
Deferred income taxes, net8,908 11,300 
Other assets29,131 42,770 
Total assets$2,244,467 $2,253,747 
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest bearing deposits$280,947 $270,235 
Interest bearing deposits1,578,861 1,557,081 
Total deposits1,859,808 1,827,316 
Advances from the Federal Home Loan Bank125,000 175,000 
Subordinated debentures ($25,500 face, less unamortized debt issuance costs of $229 and $242 at March 31, 2021 and December 31, 2020, respectively)
25,271 25,258 
Accrued expenses and other liabilities46,445 49,571 
Total liabilities2,056,524 2,077,145 
Commitments and contingencies
Shareholders' equity
Common stock, no par value; 10,000,000 shares authorized, 7,908,630 and 7,919,278 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively
120,398 121,338 
Retained earnings75,418 70,839 
Accumulated other comprehensive loss(7,873)(15,575)
Total shareholders' equity187,943 176,602 
Total liabilities and shareholders' equity$2,244,467 $2,253,747 

See accompanying notes to consolidated financial statements (unaudited)
4


Bankwell Financial Group, Inc.
Consolidated Statements of Income – (unaudited)
(In thousands, except share data)
Three Months Ended March 31,
20212020
Interest and dividend income
Interest and fees on loans$17,900 $18,985 
Interest and dividends on securities769 825 
Interest on cash and cash equivalents108 286 
Total interest and dividend income18,777 20,096 
Interest expense
Interest expense on deposits3,114 5,709 
Interest expense on borrowings1,008 1,101 
Total interest expense4,122 6,810 
Net interest income14,655 13,286 
(Credit) provision for loan losses(296)3,185 
Net interest income after provision for loan losses14,951 10,101 
Noninterest income
Gains and fees from sales of loans513  
Bank-owned life insurance231 243 
Service charges and fees199 217 
Other1,013 612 
Total noninterest income1,956 1,072 
Noninterest expense
Salaries and employee benefits4,769 5,380 
Occupancy and equipment2,406 1,909 
Professional services587 711 
Data processing512 536 
FDIC insurance403 70 
Director fees317 295 
Marketing(9)162 
Other653 596 
Total noninterest expense9,638 9,659 
Income before income tax expense7,269 1,514 
Income tax expense1,579 151 
Net income$5,690 $1,363 
Earnings Per Common Share:
Basic$0.72 $0.17 
Diluted$0.71 $0.17 
Weighted Average Common Shares Outstanding:
Basic7,758,540 7,750,135 
Diluted7,800,777 7,778,762 
Dividends per common share$0.14 $0.14 

See accompanying notes to consolidated financial statements (unaudited)
5


Bankwell Financial Group, Inc.
Consolidated Statements of Comprehensive Income (Loss) – (unaudited)
(In thousands)
Three Months Ended March 31,
20212020
Net income$5,690 $1,363 
Other comprehensive income (loss):
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains on available for sale securities(1,025)2,224 
Reclassification adjustment for gain realized in net income  
Net change in unrealized (losses) gains(1,025)2,224 
Income tax benefit (expense) 227 (494)
Unrealized (losses) gains on securities, net of tax(798)1,730 
Unrealized gains (losses) on interest rate swaps:
Unrealized gains (losses) on interest rate swaps10,934 (17,426)
Income tax (expense) benefit(2,434)3,878 
Unrealized gains (losses) on interest rate swaps, net of tax8,500 (13,548)
Total other comprehensive income (loss), net of tax7,702 (11,818)
Comprehensive income (loss)$13,392 $(10,455)

See accompanying notes to consolidated financial statements (unaudited)
6


Bankwell Financial Group, Inc.
Consolidated Statements of Shareholders' Equity – (unaudited)
(In thousands, except share data)
Number of Outstanding SharesCommon StockRetained EarningsAccumulated Other Comprehensive LossTotal
Balance at December 31, 20207,919,278 $121,338 $70,839 $(15,575)$176,602 
Net income— — 5,690 — 5,690 
Other comprehensive income, net of tax— — — 7,702 7,702 
Cash dividends declared ($0.14 per share)
— — (1,111)— (1,111)
Stock-based compensation expense— 431 — — 431 
Forfeitures of restricted stock(150)— — — — 
Issuance of restricted stock51,628 — — — — 
Stock options exercised3,500 53 — — 53 
Repurchase of common stock(65,626)(1,424)— — (1,424)
Balance at March 31, 20217,908,630 $120,398 $75,418 $(7,873)$187,943 
Number of Outstanding SharesCommon StockRetained EarningsAccumulated Other Comprehensive LossTotal
Balance at December 31, 20197,868,803 $120,589 $69,324 $(7,516)$182,397 
Net income— — 1,363 — 1,363 
Other comprehensive loss, net of tax— — — (11,818)(11,818)
Cash dividends declared ($0.14 per share)
— — (1,092)— (1,092)
Stock-based compensation expense— 385 — — 385 
Forfeitures of restricted stock(1,425)— — — — 
Issuance of restricted stock61,040 — — — — 
Stock options exercised1,500 16 — — 16 
Repurchase of common stock(58,499)(1,037)— — (1,037)
Balance at March 31, 20207,871,419 $119,953 $69,595 $(19,334)$170,214 

See accompanying notes to consolidated financial statements (unaudited)
7


Bankwell Financial Group, Inc.
Consolidated Statements of Cash Flows – (unaudited)
(In thousands)
Three Months Ended March 31,
20212020
Cash flows from operating activities
Net income$5,690 $1,363 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Net amortization of premiums and discounts on investment securities30 7 
(Credit) provision for loan losses(296)3,185 
Provision (credit) for deferred income taxes185 (866)
Change in fair value of marketable equity securities36 (39)
Depreciation and amortization791 830 
Amortization of debt issuance costs13 13 
Increase in cash surrender value of bank-owned life insurance(231)(243)
Gains and fees from sales of loans(513) 
Stock-based compensation431 385 
Amortization of intangibles9 18 
Loss on sale of premises and equipment6  
Net change in:
Deferred loan fees(403)4 
Accrued interest receivable(727)92 
Other assets11,854 (20,000)
Accrued expenses and other liabilities(181)(1,591)
Net cash provided by (used in) operating activities16,694 (16,842)
Cash flows from investing activities
Proceeds from principal repayments on available for sale securities4,329 2,312 
Proceeds from principal repayments on held to maturity securities4,592 58 
Purchases of marketable equity securities(7)(132)
Purchase of held to maturity securities(4,736) 
Net increase in loans(47,756)(16,495)
Loan principal sold from loans not originated for sale(3,967) 
Proceeds from sales of loans not originated for sale4,480  
Purchases of premises and equipment, net(2,646)(40)
Reduction of Federal Home Loan Bank stock1,414 968 
Net cash used in investing activities(44,297)(13,329)
See accompanying notes to consolidated financial statements (unaudited)
8


Bankwell Financial Group, Inc.
Consolidated Statements of Cash Flows - (Continued)
(In thousands)
Three Months Ended March 31,
20212020
Cash flows from financing activities
Net change in time certificates of deposit$(83,269)$195,674 
Net change in other deposits115,761 (6,445)
Net change in FHLB advances(50,000)(25,000)
Proceeds from exercise of options53 16 
Dividends paid on common stock(1,111)(1,092)
Repurchase of common stock(1,424)(1,037)
Net cash (used in) provided by financing activities(19,990)162,116 
Net (decrease) increase in cash and cash equivalents(47,593)131,945 
Cash and cash equivalents:
Beginning of year409,598 78,051 
End of period$362,005 $209,996 
Supplemental disclosures of cash flows information:
Cash paid for:
Interest$4,694 $6,503 
Income taxes109 63 
Noncash investing and financing activities:
Net change in unrealized gains or losses on available for sale securities(1,025)2,224 
Net change in unrealized gains or losses on interest rate swaps10,934 (17,426)
Establishment of right-of-use asset and lease liability9,775 103 

See accompanying notes to consolidated financial statements (unaudited)
9



1. Nature of Operations and Summary of Significant Accounting Policies

Bankwell Financial Group, Inc. (the "Parent Corporation") is a bank holding company headquartered in New Canaan, Connecticut. The Parent Corporation offers a broad range of financial services through its banking subsidiary, Bankwell Bank (the "Bank" and, collectively with the Parent Corporation and the Parent Corporation's subsidiaries, the "Company").

The Bank is a Connecticut state chartered commercial bank, founded in 2002, whose deposits are insured under the Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation (“FDIC”). The Bank provides a range of services to customers primarily concentrated in Connecticut, with the majority of the Company's loans in Fairfield and New Haven Counties and some New York metro area counties. In addition, the Bank pursues certain types of commercial lending opportunities in other markets outside our primary market, particularly where we have strong existing relationships. The Bank operates branches in New Canaan, Stamford, Fairfield, Wilton, Westport, Darien, Norwalk, and Hamden Connecticut.

Principles of consolidation

The consolidated financial statements include the accounts of the Company and the Bank, including its wholly owned passive investment company subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of estimates

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and general practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities as of the date of the consolidated balance sheet, and revenue and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the allowance for loan losses, the valuation of derivative instruments, investment securities valuation, evaluation of investment securities for other than temporary impairment and deferred income taxes valuation.

The COVID-19 pandemic has resulted in significant economic disruption affecting our business and the clients we serve. As vaccination efforts have rapidly expanded, restrictions on businesses are being lifted and a return to more normal economic activity is expected. However, a significant degree of uncertainty still exists concerning the ultimate duration and magnitude of the COVID-19 pandemic. Given the ongoing and dynamic nature of the circumstances, it is still difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, including but not limited to the continued roll-out of vaccinations, which play an important role as to when the coronavirus can be controlled and abated.

Basis of consolidated financial statement presentation

The unaudited consolidated financial statements presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and Rule 10-01 of Regulation S-X and do not include all of the information and note disclosures required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for the fair presentation of the accompanying unaudited interim consolidated financial statements have been included. Interim results are not necessarily reflective of the results that may be expected for the year ending December 31, 2021. The accompanying unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included on Form 10-K for the year ended December 31, 2020.

Significant concentrations of credit risk

Many of the Company's activities are with customers located in Connecticut, with the majority of the Company's loans in Fairfield and New Haven Counties and some New York metro area counties, and declines in property values in these areas could significantly impact the Company. The Company has significant concentrations in commercial real estate loans. The Company does not have any significant concentrations in any one industry or customer.

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.
10


Reclassification

Certain prior period amounts may be reclassified to conform to the 2021 financial statement presentation. These reclassifications only change the reporting categories and do not affect the consolidated results of operations or consolidated financial position of the Company.

Recent Events Concerning the Company’s Financial Position

Under the provisions of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), the Company is eligible for an employee retention credit subject to certain criteria. In connection with the CARES Act, the Company adopted a policy to recognize the employee retention credit when earned and to recognize the credit as other noninterest income in the consolidated statements of income. Accordingly, the Company recorded a $0.9 million employee retention credit during the three months ended March 31, 2021.

Recent accounting pronouncements

The following section includes changes in accounting principles and potential effects of new accounting guidance and pronouncements.

Recently issued accounting pronouncements not yet adopted
ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments.” This ASU changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward looking “expected loss” model that will replace today’s “incurred loss” model and can result in the earlier recognition of credit losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. On July 17, 2019, the FASB proposed deferring the effective date of ASC 326 for smaller reporting companies as defined by the SEC. The FASB proposed a three year deferral for smaller reporting companies, with an effective date of January 1, 2023. On October 16, 2019, the FASB voted in favor of finalizing its proposal to defer the effective date of this standard. The FASB issued ASU No. 2019-10, which officially delayed the adoption of this standard for smaller reporting companies until fiscal years beginning after December 15, 2022. The Company does qualify to defer the adoption of this standard and has not yet adopted this standard. Management continues to evaluate the impact of its future adoption of this guidance on the Company’s financial statements.

ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): “Simplifying the Test for Goodwill Impairment.” This ASU simplifies the test for goodwill impairment by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity was required to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, this ASU also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. On October 16, 2019, the FASB voted in favor of a proposal to defer the effective date of this standard in the same manner it is deferring the effective date of ASC 326. The FASB issued ASU No. 2019-10, which officially delayed the adoption of this standard for smaller reporting companies until fiscal years beginning after December 15, 2022. The Company does qualify to defer the adoption of this standard and has not yet adopted this standard. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements.

Recently adopted accounting pronouncements
ASU No. 2020-04, Reference Rate Reform (Topic 848): "Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this update are effective for all entities as of March 12, 2020
11


through December 31, 2022. Optional expedients include that modifications of contracts should be accounted for by prospectively adjusting the effective interest rate and modifications of leases should be accounted for as a continuation of the existing contract with no reassessments of lease classification and discount rate or remeasurements of lease payments. This ASU also provides many practical expedients for derivative accounting. In addition, an entity may elect to sell and/or transfer held to maturity securities that reference a rate affected by the reference rate reform classified as held to maturity prior to January 1, 2020. In particular, the Company made the following elections as it relates to hedging relationships; (1) Option to not reassess a previous accounting determination (paragraph 848-20-35-2); (2) Option to not dedesignate a hedging relationship due to a change in critical term (paragraph 848-20-35-3); (3) Option to change the contractual terms of a hedging instrument, hedged item, or forecasted transaction and to not dedesignate a hedging relationship (paragraph 848-30-25-5); (4) Adopt expedient ASC 848-50-25-2 to assert probability of the hedged interest regardless of any expected modification in terms related to reference rate reform; and (5) To continue the method of assessing effectiveness as documented in the original hedge documentation and apply the expedient in ASC 848-50-35-17 so that the reference rate on the hypothetical derivative matches the reference rate on the hedging instrument. For new hedging relationships designated subsequent to December 31, 2020, the Company elects to apply the expedient in ASC 848-50-25-11 to assume that the reference rate will not be replaced for the remainder of the hedging relationship. The application of this guidance did not have a material impact on the Company's financial statements.

2. Investment Securities

The amortized cost, gross unrealized gains and losses and fair value of available for sale and held to maturity securities at March 31, 2021 were as follows:
March 31, 2021
Amortized CostGross UnrealizedFair Value
GainsLosses
(In thousands)
Available for sale securities:
U.S. Government and agency obligations
Less than one year$9,982 $130 $ $10,112 
Due from five through ten years7,993 572  8,565 
Due after ten years51,237 1,842 (93)52,986 
Total U.S. Government and agency obligations69,212 2,544 (93)71,663 
Corporate bonds
Due from five through ten years10,000 93 (41)10,052 
Due after ten years1,500 3  1,503 
Total corporate bonds11,500 96 (41)11,555 
Total available for sale securities$80,712 $2,640 $(134)$83,218 
Held to maturity securities:
State agency and municipal obligations
Due after ten years$16,169 $2,580 $(264)$18,485 
Government-sponsored mortgage backed securities
No contractual maturity56 9  65 
Total held to maturity securities$16,225 $2,589 $(264)$18,550 
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The amortized cost, gross unrealized gains and losses and fair value of available for sale and held to maturity securities at December 31, 2020 were as follows:
December 31, 2020
Amortized CostGross UnrealizedFair Value
GainsLosses
(In thousands)
Available for sale securities:
U.S. Government and agency obligations
Less than one year$9,976 $172 $ $10,148 
Due from five through ten years8,038 848  8,886 
Due after ten years55,560 2,284  57,844 
Total U.S. Government and agency obligations73,574 3,304  76,878 
Corporate bonds
Due from one through five years4,000 57  4,057 
Due from five through ten years6,000 163  6,163 
Due after ten years1,500 7  1,507 
Total corporate bonds11,500 227  11,727 
Total available for sale securities$85,074 $3,531 $ $88,605 
Held to maturity securities:
State agency and municipal obligations
Due after ten years$16,018 $3,944 $ $19,962 
Government-sponsored mortgage backed securities
No contractual maturity60 10  70 
Total held to maturity securities$16,078 $3,954 $ $20,032 

There were no sales of investment securities during the three months ended March 31, 2021 or 2020.

At March 31, 2021 and December 31, 2020, none of the Company's securities were pledged as collateral with the Federal Home Loan Bank ("FHLB") or any other institution.

As of March 31, 2021 and December 31, 2020, the actual durations of the Company's available for sale securities were significantly shorter than the stated maturities.

As of March 31, 2021, the Company held marketable equity securities with a fair value of $2.2 million and an amortized cost of $2.1 million. At December 31, 2020, the Company held marketable equity securities with a fair value of $2.2 million and an amortized cost of $2.1 million. These securities represent an investment in mutual funds that have an objective to make investments for CRA purposes.

There were no investment securities as of December 31, 2020, in which the fair value of the security was less than the amortized cost of the security.


13


The following table provides information regarding investment securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2021:

Length of Time in Continuous Unrealized Loss Position
Less Than 12 Months12 Months or MoreTotal
Fair ValueUnrealized
Loss
Percent
Decline from
Amortized Cost
Fair ValueUnrealized
Loss
Percent
Decline from
Amortized Cost
Fair ValueUnrealized
Loss
Percent
Decline from
Amortized Cost
(Dollars in thousands)
March 31, 2021
U.S. Government and agency obligations$8,710 $(93)1.05 %$ $  %$8,710 $(93)1.05 %
Corporate bonds5,959 (41)0.68    5,959 (41)0.68 
State agency and municipal obligations4,430 (264)5.63    4,430 (264)5.63 
Total investment securities$19,099 $(398)2.04 %$ $  %$19,099 $(398)2.04 %

There were six investment securities as of March 31, 2021, in which the fair value of the security was less than the amortized cost of the security.

The U.S. Government and agency obligations owned are either direct obligations of the U.S. Government or guaranteed by the U.S. Government, therefore the contractual cash flows are guaranteed and as a result the unrealized losses in this portfolio are considered to be only temporarily impaired.

The Company continually monitors its state agency, municipal and corporate bond portfolios and at this time these portfolios have minimal default risk because state agency, municipal and corporate bonds are all rated investment grade or deemed to be of investment grade quality.

The Company has the intent and ability to retain its investment securities in an unrealized loss position at March 31, 2021 until the decline in value has recovered or the security has matured.


14


3. Loans Receivable and Allowance for Loan Losses

The following table sets forth a summary of the loan portfolio at March 31, 2021 and December 31, 2020:
(In thousands)March 31, 2021December 31, 2020
Real estate loans:
Residential$109,752 $113,557 
Commercial1,183,848 1,148,383 
Construction103,099 87,007 
1,396,699 1,348,947 
Commercial business (1)
267,698 276,601 
Consumer8,818 79 
Total loans1,673,215 1,625,627 
Allowance for loan losses(20,545)(21,009)
Deferred loan origination fees, net(2,543)(2,946)
Loans receivable, net$1,650,127 $1,601,672 

(1) The March 31, 2021 and December 31, 2020 balance includes $19.2 million and $34.8 million, respectively, of Paycheck Protection Program ("PPP") loans made under the CARES Act.

Lending activities consist of commercial real estate loans, commercial business loans and, to a lesser degree, a variety of consumer loans. Loans may also be granted for the construction of commercial properties. The majority of commercial mortgage loans are collateralized by first or second mortgages on real estate.

Risk management

The Company has established credit policies applicable to each type of lending activity in which it engages. The Company evaluates the creditworthiness of each customer and extends credit of up to 80% of the market value of the collateral, depending on the borrower's creditworthiness and the type of collateral. The borrower’s ability to service the debt is monitored on an ongoing basis. Real estate is the primary form of collateral. Other important forms of collateral are business assets, time deposits and marketable securities. While collateral provides assurance as a secondary source of repayment, the Company ordinarily requires the primary source of repayment for commercial loans to be based on the borrower’s ability to generate continuing cash flows. In the fourth quarter of 2017, management made the strategic decision to cease the origination of residential mortgage loans. At the beginning of the third quarter 2019, the Company no longer offered home equity loans or lines of credit. The Company’s policy for residential lending generally required that the amount of the loan may not exceed 80% of the original appraised value of the property. In certain situations, the amount may have exceeded 80% LTV either with private mortgage insurance being required for that portion of the residential loan in excess of 80% of the appraised value of the property or where secondary financing is provided by a housing authority program second mortgage, a community’s low/moderate income housing program, or a religious or civic organization.


15


Credit quality of loans and the allowance for loan losses

Management segregates the loan portfolio into defined segments, which are used to develop and document a systematic method for determining the Company's allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate.

The Company's loan portfolio is segregated into the following portfolio segments:

Residential Real Estate: This portfolio segment consists of first mortgage loans secured by one-to-four family owner occupied residential properties for personal use located in the Company's market area. This segment also includes home equity loans and home equity lines of credit secured by owner occupied one-to-four family residential properties. Loans of this type were written at a combined maximum of 80% of the appraised value of the property and the Company requires a first or second lien position on the property. These loans can be affected by economic conditions and the values of the underlying properties.

Commercial Real Estate: This portfolio segment includes loans secured by commercial real estate, multi-family dwellings and investor-owned one-to-four family dwellings. Loans secured by commercial real estate generally have larger loan balances and more credit risk than owner occupied one-to-four family mortgage loans.

Construction: This portfolio segment includes commercial construction loans for commercial development projects, including apartment buildings and condominiums, as well as office buildings, retail and other income producing properties and land loans, which are loans made with land as collateral. Construction and land development financing generally involves greater credit risk than long-term financing on improved, owner-occupied or leased real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, the Company may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment through sale or refinance. Construction loans also expose the Company to the risks that improvements will not be completed on time in accordance with specifications and projected costs and that repayment will depend on the successful operation or sale of the properties, which may cause some borrowers to be unable to continue paying debt service, which exposes the Company to greater risk of non-payment and loss.

Commercial Business: This portfolio segment includes commercial business loans secured by assignments of corporate assets and personal guarantees of the business owners. Commercial business loans generally have higher interest rates and shorter terms than other loans, but they also have increased difficulty of loan monitoring and a higher risk of default since their repayment generally depends on the successful operation of the borrower’s business. This segment also includes Paycheck Protection Program ("PPP") loans made under the CARES Act to small businesses impacted by COVID-19, to cover payroll and other operating expenses. Loans extended under the PPP are fully guaranteed by the U.S. Small Business Administration ("SBA").

Consumer: This portfolio segment includes loans secured by savings or certificate accounts, automobiles, as well as unsecured personal loans and overdraft lines of credit. This type of loan entails greater risk than residential mortgage loans, particularly in the case of loans that are unsecured or secured by assets that depreciate rapidly.



16


Allowance for loan losses

The following tables set forth the activity in the Company’s allowance for loan losses for the three months ended March 31, 2021 and 2020, by portfolio segment:
Residential Real EstateCommercial Real EstateConstructionCommercial BusinessConsumerTotal
(In thousands)
Three Months Ended March 31, 2021
Beginning balance$610 $16,425 $221 $3,753 $ $21,009 
Charge-offs (163)  (14)(177)
Recoveries    9 9 
(Credits) provisions(109)(3)76 (301)41 (296)
Ending balance$501 $16,259 $297 $3,452 $36 $20,545 

Residential Real EstateCommercial Real EstateConstructionCommercial BusinessConsumerTotal
(In thousands)
Three Months Ended March 31, 2020
Beginning balance$730 $