FINANCIÈRE BANKWELL: Management report and analysis of financial position and operating results (Form 10-Q)

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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, 2020 in the sections titled "Cautionary Note Regarding
Forward-Looking Statements" and "Risk Factors." We assume no obligation to
update any of these forward-looking statements.

General

Bankwell Financial Group, Inc. is a bank holding company headquartered in New
Canaan, Connecticut. Through our wholly owned subsidiary, Bankwell Bank, or the
Bank, we serve small and medium-sized businesses and retail customers in
Connecticut, with the majority of the Company's loans in Fairfield and New Haven
Counties and some New York metro area counties. We have a history of building
long-term customer relationships and attracting new customers through what we
believe is our strong customer service and our ability to deliver a diverse
product offering.

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 allowance for loan losses to total loans, return on
average assets and return on average equity, among other metrics, while
maintaining appropriate regulatory leverage and risk-based capital ratios.

Executive overview

We strive to be the “local” bank and banking provider of choice in our very attractive market area, and to serve as a local alternative to our larger competitors. We aim to do this through:

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

• Organic growth and strategic acquisitions when market opportunities arise;

• Use of an efficient and scalable infrastructure; and

• Disciplined focus on risk management.

Impact of COVID-19

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.

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

Revenue and performance overview

For the three months ended March 31, 2021, we had net interest income of $14.7
million, an increase of $1.4 million or 10.3% when compared to the same period
in 2020. The increase in net interest income was primarily due to a decline in
interest expense from lower interest rates when compared to the same period in
2020.

Noninterest income increased $0.9 million to $2.0 million for the three months
ended March 31, 2021 compared to the same period in 2020. The increase in
noninterest income for the three months ended March 31, 2021, when compared to
the same periods in 2020, was primarily a result of resumed SBA loan sales,
totaling $0.5 million for the quarter ended March 31, 2021. In addition, the
increase was impacted by a one-time federal payroll tax credit for COVID-19 of
$0.9 million, partially offset by $0.4 million of non-recurring interest rate
swap fees recognized in the quarter ended March 31, 2020.

In the fourth quarter of 2020, the Company recognized a $3.9 million one-time
charge recorded in noninterest expense for office consolidation, vendor contract
termination and employee severance costs. As of March 31, 2021, the Company has
paid a total of $0.3 million in employee severance costs and a total of $21
thousand in vendor contract termination costs. Reference the 2020 Form 10-K for
further discussion on these charges.

Net income available to common shareholders was $ 5.7 million, or $ 0.71 per diluted share, and $ 1.4 million, or $ 0.17 per diluted share, for the three months ended March 31, 2021 and 2020, respectively. The increase in net income was impacted by the aforementioned increases in net interest income and non-interest income.

Returns on average stockholders' equity and average assets for the three months
ended March 31, 2021 were 12.67% and 1.02%, respectively, compared to 3.03% and
0.29%, respectively, for the three months ended March 31, 2020.

Results of operations

Net interest income

Net interest income is the difference between interest earned on loans and
securities and interest paid on deposits and other borrowings, and is the
primary source of our operating income. Net interest income is affected by the
level of interest rates, changes in interest rates and changes in the amount and
composition of interest earning assets and interest bearing liabilities.
Included in interest income are certain loan fees, such as deferred origination
fees and late charges. We convert tax-exempt income to a 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 March 31, 2021 and 2020 was
$14.7 million and $13.3 million, respectively. FTE interest income for the three
months ended March 31, 2021 decreased by $1.3 million, or 6.6%, to $18.8
million, compared to FTE interest income for the three months ended March 31,
2020. This decrease was due to lower loan yields as loans re-priced at lower
interest rates throughout 2020. Interest expense for the three months ended
March 31, 2021 decreased by $2.7 million, or 39.5%, compared to interest expense
for the three months ended March 31, 2020. This decrease is due to lower
interest rates on deposits.

Net interest margin decreased 24 basis points to 2.74% for the quarter ended March 31, 2021, compared to the three months ended March 31, 2020. The decrease in the net interest margin is mainly attributable to excess liquidity.

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Breakdown of assets, liabilities and equity; Interest rate and interest differential

The following table shows the average balances and returns earned on interest-bearing assets and the average balances and weighted average rates paid on our financing liabilities for the quarter ended. March 31, 2021 and 2020.

                                                                                 Three Months Ended March 31,
                                                             2021                                                             2020

                                                                               Yield / Rate                                                     Yield / Rate
(Dollars in thousands)              Average Balance          Interest              (5)               Average Balance          Interest              (5)
Assets:
Cash and Fed funds sold           $        401,900          $    108                 0.11  %       $         73,497          $    286                 1.56  %
Securities (1)                             101,176               788                 3.11                    98,566               775                 3.15
Loans:
Commercial real estate                   1,129,224            12,731                 4.51                 1,108,709            13,024                 4.65
Residential real estate                    112,053               964                 3.44                   143,826             1,357                 3.77
Construction (2)                            94,075               885                 3.76                   100,437             1,215                 4.78
Commercial business                        294,756             3,271                 4.44                   258,848             3,386                 5.18
Consumer                                     5,039                49                 3.94                       156                 3                 8.37
Total loans                              1,635,147            17,900                 4.38                 1,611,976            18,985                 4.66
Federal Home Loan Bank stock                 6,508                31                 1.96                     7,325               103                 5.65
Total earning assets                     2,144,731          $ 18,827                 3.51  %              1,791,364          $ 20,149                 4.45  %
Other assets                               113,561                                                          111,585
Total assets                      $      2,258,292                                                 $      1,902,949

Liabilities and shareholders'
equity:
Interest bearing liabilities:
NOW                               $        101,057          $     43                 0.17  %       $         67,925          $     28                 0.17  %
Money market                               736,659               950                 0.52                   438,588             1,492                 1.37
Savings                                    160,347               125                 0.32                   185,478               672                 1.46
Time                                       611,153             1,996                 1.32                   640,580             3,517                 2.21
Total interest bearing deposits          1,609,216             3,114                 0.78                 1,332,571             5,709                 1.72
Borrowed money                             152,485             1,008                 2.64                   172,464             1,101                 2.53
Total interest bearing
liabilities                              1,761,701          $  4,122                 0.95  %              1,505,035          $  6,810                 1.82  %
Noninterest bearing deposits               269,863                                                          179,066
Other liabilities                           44,670                                                           37,721
Total Liabilities                        2,076,234                                                        1,721,822
Shareholders' equity                       182,058                                                          181,127

Total liabilities and
shareholders' equity              $      2,258,292                                                 $      1,902,949
Net interest income (3)                                     $ 14,705                                                         $ 13,339
Interest rate spread                                                                 2.56  %                                                          2.63  %
Net interest margin (4)                                                              2.74  %                                                          2.98  %


(1)Average balances and yields for securities are based on amortized cost.
(2)Includes commercial and residential real estate construction.
(3)The adjustment for securities and loans taxable equivalency amounted to $50
thousand and $53 thousand for the three months ended March 31, 2021 and 2020,
respectively.
(4)Annualized net interest income as a percentage of earning assets.
(5)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 the volume of average productive 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 March 31, 2021 vs 2020
                                                                   Increase (Decrease)
(In thousands)                                       Volume                 Rate                Total
Interest and dividend income:
Cash and Fed funds sold                         $         300          $      (478)         $      (178)
Securities                                                 21                   (8)                  13
Loans:
Commercial real estate                                    238                 (531)                (293)
Residential real estate                                  (281)                (112)                (393)
Construction                                              (73)                (257)                (330)
Commercial business                                       437                 (552)                (115)
Consumer                                                   49                   (3)                  46
Total loans                                               370               (1,455)              (1,085)
Federal Home Loan Bank stock                              (11)                 (61)                 (72)
Total change in interest and dividend income              680               (2,002)              (1,322)
Interest expense:
Deposits:
NOW                                                        14                    1                   15
Money market                                              687               (1,229)                (542)
Savings                                                   (81)                (466)                (547)
Time                                                     (155)              (1,366)              (1,521)
Total deposits                                            465               (3,060)              (2,595)
Borrowed money                                           (131)                  38                  (93)
Total change in interest expense                          334               (3,022)              (2,688)
Change in net interest income                   $         346          $     1,020          $     1,366



Provision for Loan Losses

The provision for loan losses is based on management's periodic assessment of
the adequacy of our allowance for loan losses which, in turn, is based on
interrelated factors such as the composition of our loan portfolio and its
inherent risk characteristics, the level of nonperforming loans and net
charge-offs, both current and historic, local economic and credit conditions,
the direction of real estate values, and regulatory guidelines. The provision
for loan losses is charged against earnings in order to maintain our allowance
for loan losses and reflects management's best estimate of probable losses
inherent in our loan portfolio as of the balance sheet date.

The credit for loan losses for the three months ended March 31, 2021 was $0.3
million compared to a provision for loan losses of $3.2 million for the three
months ended March 31, 2020. The decrease in the provision for loan losses for
the three months ended March 31, 2021 was primarily due to improving economic
trends, partially offset by increased reserves on impaired loans and overall
higher loan balances.

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Non-interest income

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

The following table compares noninterest income for the three months ended March
31, 2021 and 2020:
                                            Three Months Ended
                                                 March 31,                    Change
(Dollars in thousands)                       2021            2020          $          %
Gains and fees from sales of loans     $      513          $     -      $ 513           N/A
Bank-owned life insurance                     231              243        (12)      (4.9)
Service charges and fees                      199              217        (18)      (8.3)

Other                                       1,013              612        401       65.5
Total noninterest income               $    1,956          $ 1,072      $ 884       82.5  %



Noninterest income increased by $0.9 million, or 82.5%, to $2.0 million for the
three months ended March 31, 2021 compared to the three months ended March 31,
2020.

The increase in noninterest income was driven by resumed SBA loan sales,
totaling $0.5 million for the quarter ended March 31, 2021. In addition, the
increase was impacted by a one-time federal payroll tax credit for COVID-19 of
$0.9 million, partially offset by $0.4 million of non-recurring interest rate
swap fees recognized in the quarter ended March 31, 2020.

Interest-free expenses

The following table compares noninterest expense for the three months ended
March 31, 2021 and 2020:
                                      Three Months Ended
                                           March 31,                      Change
(Dollars in thousands)                 2021            2020          $            %

Salaries and Benefits $ 4,769 $ 5,380 (611) $

    (11.4) %
Occupancy and equipment               2,406            1,909         497         26.0
Professional services                   587              711        (124)       (17.4)
Data processing                         512              536         (24)        (4.5)
FDIC insurance                          403               70         333        475.7
Director fees                           317              295          22          7.5
Marketing                                (9)             162        (171)      (105.6)
Other                                   653              596          57          9.6
Total noninterest expense        $    9,638          $ 9,659      $  (21)        (0.2) %



Noninterest expense decreased by $21.0 thousand, or 0.2%, to $9.6 million for
the three months ended March 31, 2021 compared to the three months ended March
31, 2020. The decrease in noninterest expense was primarily driven by a decline
in salaries and employee benefits and marketing expense, partially offset by an
increase in occupancy and equipment expense and FDIC insurance expense.

Salaries and employee benefits totaled $4.8 million for the quarter ended March
31, 2021, a decrease of $0.6 million when compared to the same period in 2020.
The decrease in salaries and employee benefits was primarily driven by a
decrease in full time equivalent employees as a direct result of the Voluntary
Early Retirement Incentive Plan offered to eligible employees and other employee
actions taken during the fourth quarter of 2020. Full time equivalent employees
totaled 123 at March 31, 2021 compared to 154 for the same period in 2020.
Salaries and employee benefits were also favorably impacted as higher loan
originations enabled the bank to defer a greater amount of expenses.

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Occupancy and equipment expense totaled $2.4 million for the quarter ended March
31, 2021, an increase of $0.5 million when compared to the same period in 2020.
The increase in occupancy and equipment expense was primarily due to additional
cleaning costs associated with precautions taken to prevent the spread of
COVID-19.

FDIC insurance expense totaled $0.4 million for the quarter ended March 31,
2021, an increase of $0.3 million when compared to the same period in 2020. The
increase in FDIC insurance expense was due to the application of available FDIC
insurance credits in the first quarter of 2020.

Income taxes

Income tax expense for the three months ended March 31, 2021 and 2020 totaled
$1.6 million and $0.2 million, respectively. The effective tax rates for the
three months ended March 31, 2021 and 2020 were 21.7% and 10.0%, respectively.
For the three months ended March 31, 2021, the increase in the effective tax
rate was primarily attributable to a discrete benefit recognized in the first
quarter of 2020.The impact of these items on the effective tax rate varies with
changes in pre-tax income.

Financial Condition

Summary

At March 31, 2021 total assets were $2.2 billion, a $9.3 million, or a 0.4%
decrease compared to December 31, 2020. The decrease in assets is primarily due
to a decrease in excess liquidity, partially offset by an increase in loans.
Gross loans totaled $1.7 billion at March 31, 2021, an increase of $47.6 million
compared to December 31, 2020. Excluding PPP loans, gross loans increased by
$63.2 million at March 31, 2021 when compared to December 31, 2020. Deposits
totaled $1.9 billion at March 31, 2021, compared to $1.8 billion at December 31,
2020.

Total shareholders' equity at March 31, 2021 and December 31, 2020 was $187.9
million and $176.6 million, respectively. The increase in shareholders' equity
was primarily driven by (i) a $7.7 million favorable impact to accumulated other
comprehensive income driven by fair value marks related to hedge positions
involving interest rate swaps and (ii) net income for the quarter ended March
31, 2021 of $5.7 million. The Company's interest rate swaps are used to hedge
interest rate risk. The Company's current interest rate swap positions will
cause a decrease to other comprehensive income in a falling interest rate
environment and an increase in a rising interest rate environment. The increase
in Shareholders' equity was partially offset by dividends paid of $1.1 million
and common stock repurchases of $1.4 million.

Loan portfolio

We provide commercial real estate loans, including construction loans, commercial business loans and other consumer loans. Our loan portfolio is the largest category of our earning assets.

Total loans before deferred loan fees and the allowance for loan losses were
$1.67 billion at March 31, 2021 and $1.63 billion at December 31, 2020. Total
gross loans increased $47.6 million as of March 31, 2021 compared to the year
ended December 31, 2020.

The following table compares the composition of our loan portfolio for the dates
indicated:
(In thousands)         At March 31, 2021       At December 31, 2020        Change
Real estate loans:
Residential           $          109,752      $             113,557      $ (3,805)
Commercial                     1,183,848                  1,148,383        35,465
Construction                     103,099                     87,007        16,092
                               1,396,699                  1,348,947        47,752
Commercial business              267,698                    276,601        (8,903)
Consumer                           8,818                         79         8,739
Total loans           $        1,673,215      $           1,625,627      $ 47,588


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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
through two committees, the Directors Loan Committee ("DLC") and the Audit
Committee. The DLC has primary oversight responsibility for the credit granting
function including approval authority for credit granting policies, review of
management's credit granting activities and approval of large exposure credit
requests. The Audit Committee oversees management's systems and procedures to
monitor the credit quality of our loan portfolio and the loan review program.
These committees report the results of their respective oversight functions to
our Board of Directors. In addition, our Board of Directors receives information
concerning asset quality measurements and trends on a 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 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
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 no longer originate
residential mortgage loans. As of the beginning of the third quarter of 2019,
the Company no longer offered home equity loans or lines of credit. The
Company's policy for residential lending generally required that the amount of
the loan may not exceed 80% of the original appraised value of the property. In
certain situations, the amount may have exceeded 80% LTV either with private
mortgage insurance being required for that portion of the residential loan in
excess of 80% of the appraised value of the property or where secondary
financing is provided by a housing authority program second mortgage, a
community's low/moderate income housing program, or a religious or civic
organization.

Credit risk management involves a partnership between our relationship managers
and our credit approval, portfolio management, credit administration and
collections personnel. 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 March 31, 2021      At December 31, 2020
Nonaccrual loans:
Real estate loans:
Residential                                 $          1,289       $             1,492
Commercial                                            19,277                    21,093
Commercial business                                    1,803                     1,834
Construction                                           8,997                     8,997
Total nonaccrual loans                                31,366                    33,416
Other real estate owned                                    -                         -
Total nonperforming assets                  $         31,366       $            33,416

Nonperforming assets to total assets                    1.40  %                   1.48  %
Nonaccrual loans to total gross loans                   1.87  %                   2.06  %
Total past due loans to total gross loans               2.39  %                   0.93  %



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Nonperforming assets totaled $31.4 million and represented 1.40% of total assets
at March 31, 2021, compared to $33.4 million and 1.48% of total assets at
December 31, 2020. Nonaccrual loans totaled $31.4 million at March 31, 2021.
There was no other real estate owned at March 31, 2021 or December 31, 2020.
Allowance for Loan Losses

We evaluate the adequacy of the allowance for loan losses at least quarterly,
and in determining our allowance for loan losses, we estimate losses on specific
loans, or groups of loans, where the probable loss can be identified and
reasonably determined. The balance of our allowance for loan losses is based on
internally assigned risk classifications of loans, the Bank's and peer banks'
historical loss experience, changes in the nature of the loan portfolio, overall
portfolio quality, industry concentrations, delinquency trends, current economic
factors and the estimated impact of current economic conditions on certain
historical loan loss rates.

Our general practice is to identify problem credits early and recognize full or
partial charge-offs as promptly as practicable when it is determined that it is
probable that the loan will not be repaid according to its original contractual
terms, including principal and interest. Full or partial charge-offs on
collateral dependent impaired loans are recognized when the collateral is deemed
to be insufficient to support the carrying value of the loan. We do not
recognize a recovery when an updated appraisal indicates a subsequent increase
in value of the collateral.

Our charge-off policies, which comply with standards established by our banking
regulators, are consistently applied from period to period. Charge-offs are
recorded on a monthly basis, as incurred. Partially charged-off loans continue
to be evaluated on a monthly basis and additional charge-offs or loan loss
provisions may be recorded on the remaining loan balance based on the same
criteria.

The following table shows the activity of our allowance for loan losses and the associated ratios on the dates indicated:

                                                       Three Months Ended March 31,
(Dollars in thousands)                             2021                     

2020

Balance at beginning of period         $                 21,009           $                13,509
Charge-offs:

Commercial real estate                                     (163)                                -
Commercial business                                           -                                (8)
Consumer                                                    (14)                               (2)
Total charge-offs                                          (177)                              (10)
Recoveries:
Commercial business                                           -                                 1
Consumer                                                      9                                 1
Total recoveries                                              9                                 2
Net charge-offs                                            (168)                               (8)
(Credit) provision charged to earnings                     (296)                            3,185
Balance at end of period               $                 20,545           $                16,686
Net charge-offs to average loans                           0.01   %                             -  %
Allowance for loan losses to total
gross loans                                                1.23   %                          1.03  %


AT March 31, 2021, our allowance for loan losses was $ 20.5 million and represented 1.23% of total gross loans, compared to $ 21.0 million, i.e. 1.29% of total gross loans, to December 31, 2020.

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The following table shows the breakdown of the allowance for loan losses and the percentage of these loans in relation to total loans on the dates indicated:

                                                      At March 31, 2021                            At December 31, 2020
                                                                 Percent of Loan                                Percent of Loan
(Dollars in thousands)                        Amount                Portfolio                Amount                Portfolio
Residential real estate                    $      501                      6.56  %       $       610                      6.99  %
Commercial real estate                         16,259                     70.75               16,425                     70.64
Construction                                      297                      6.16                  221                      5.35
Commercial business                             3,452                     16.00                3,753                     17.02
Consumer                                           36                      0.53                    -                         -
Total allowance for loan losses            $   20,545                    100.00  %       $    21,009                    100.00  %



The allocation of the allowance for loan losses at March 31, 2021 reflects our
assessment of credit risk and probable loss within each portfolio. We believe
that the level of the allowance for loan losses at March 31, 2021 is appropriate
to cover probable losses.

Reserve for unfunded commitments

The reserve for unfunded commitments provides for probable losses inherent with
funding the unused portion of legal commitments to lend. The unfunded reserve
calculation is primarily based on our allowance for loan loss methodology for
funded loans, adjusted for utilization expectations. The reserve for unfunded
credit commitments is included within other liabilities in the accompanying
Consolidated Balance Sheets. Changes in the reserve are reported as a component
of other noninterest expense in the accompanying Consolidated Statements of
Income.

Investment security

At March 31, 2021, the carrying value of our investment securities portfolio
totaled $101.6 million and represented 4.5% of total assets, compared to $106.9
million, or 4.7% of total assets, at December 31, 2020.

The net unrealized gain position on our investment portfolio at March 31, 2021
was $4.8 million and included gross unrealized losses of $0.4 million. The net
unrealized gain position on our investment portfolio at December 31, 2020 was
$7.5 million and included no gross unrealized losses.

Depository activities and other sources of funds

                                                             At March 31, 2021                                                     At December 31, 2020
                                                                                      Weighted Average                                                      Weighted Average
(Dollars in thousands)                    Amount                   Percent                  Rate                  Amount                 Percent                  Rate
Noninterest bearing demand          $        280,947                   15.10  %                    -  %       $    270,235                   14.79  %                    -  %
NOW                                          118,489                    6.37                    0.17               101,737                    5.57                    0.17
Money market                                 751,852                   40.43                    0.52               669,364                   36.63                    0.79
Savings                                      164,559                    8.85                    0.32               158,750                    8.69                    0.81
Time                                         543,961                   29.25                    1.32               627,230                   34.32                    1.77
Total deposits                      $      1,859,808                  100.00  %                 0.78  %       $  1,827,316                  100.00  %                 1.23  %


The total deposits were $ 1.9 billion at March 31, 2021, an augmentation of $ 32.5 million, from the scale to December 31, 2020.

Brokered certificates of deposits totaled $200.1 million at March 31, 2021 and
$238.9 million at December 31, 2020. Certificates of deposits from national
listing services totaled $4.9 million at March 31, 2021 and $18.4 million at
December 31, 2020. Brokered money market accounts totaled $53.8 million at March
31, 2021 and $13.5 million at December 31, 2020. Brokered deposits represent
brokered certificates of deposit, brokered money market accounts and one way buy
Certificate of Deposit Account Registry Service (CDARS), and one way buy Insured
Cash Sweep (ICS).
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At March 31, 2021 and December 31, 2020, time deposits with a denomination of
$100 thousand or more, including CDARS and brokered deposits, totaled $444.1
million and $519.8 million, respectively, maturing during the periods indicated
in the table below:
(Dollars in thousands)               March 31, 2021       December 31, 2020
Maturing:
Within 3 months                     $       118,547      $          141,784
After 3 but within 6 months                  77,166                  67,064
After 6 months but within 1 year             68,824                 118,880
After 1 year                                179,524                 192,051
Total                               $       444,061      $          519,779



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 $125.0 million and $175.0
million at March 31, 2021 and December 31, 2020, respectively. The decrease of
$50.0 million, or 28.6%, reflects the substitution of lower cost brokered
deposits in lieu of FHLB advances.

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 March 31, 2021, the Bank had pledged $814.3 million of
eligible loans as collateral to support borrowing capacity at the FHLB of
Boston. As of March 31, 2021, the Bank had immediate availability to borrow an
additional $384.7 million based on qualified collateral.

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 that prudent levels of liquidity are maintained. 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 the Atlantic Community Bankers Bank ("ACBB") (formerly Bankers'
Bank Northeast), Zion's Bank and Texas Capital Bank and also maintains
additional collateralized borrowing capacity with the FHLB in excess of levels
used in the ordinary course of business. Our sources of liquidity include cash,
unpledged investment securities, borrowings from the FHLB, lines of credit from
ACBB, Zion's Bank and Texas Capital Bank, the brokered deposit market and
national CD listing services.

The Company anticipates that it will have sufficient funds available to meet its
current loan and other commitments. As of March 31, 2021, the Company had cash
and cash equivalents of $362.0 million and available-for-sale securities of
$83.2 million. At March 31, 2021, outstanding commitments to originate loans
totaled $82.2 million and undisbursed funds from approved lines of credit, home
equity lines of credit and secured commercial lines of credit totaled $200.3
million.

Capital Resources

Shareholders' equity totaled $187.9 million as of March 31, 2021, an increase of
$11.3 million compared to December 31, 2020, primarily a result of (i) a $7.7
million favorable impact to accumulated other comprehensive income driven by
fair value
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marks related to hedge positions involving interest rate swaps and (ii) net
income for the quarter ended March 31, 2021 of $5.7 million. The Company's
interest rate swaps are used to hedge interest rate risk. The Company's current
interest rate swap positions will cause a decrease to other comprehensive income
in a falling interest rate environment and an increase in a rising interest rate
environment. The increase in Shareholders' equity was partially offset by
dividends paid of $1.1 million and common stock repurchases of $1.4 million. As
of March 31, 2021, the tangible common equity ratio and tangible book value per
share were 8.27% and $23.99, respectively.

The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. At March 31, 2021, the Bank met all capital
adequacy requirements to which it was subject and exceeded the regulatory
minimum capital levels to be considered well-capitalized under the regulatory
framework for prompt corrective action. At March 31, 2021, the Bank's ratio of
Common Equity Tier 1 capital to risk-weighted assets was 11.02%, total capital
to risk-weighted assets was 12.17%, Tier 1 capital to risk-weighted assets was
11.02% and Tier 1 capital to average assets was 8.82%.

In July 2013, the Federal Reserve published Basel III rules establishing a new
comprehensive capital framework of U.S. banking organizations. Under the rules,
effective January 1, 2015 for the Company and Bank, the minimum capital ratios
became a) 4.5% Common Equity Tier 1 to risk-weighted assets, b) 6.0% Tier 1
capital to risk weighted assets and c) 8.0% total capital to risk-weighted
assets. In addition, the new regulations imposed certain limitations on
dividends, share buy-backs, discretionary payments on Tier 1 instruments and
discretionary bonuses to executive officers if the banking organization does not
hold a "capital conservation buffer" consisting of 2.5% of common equity to risk
weighted assets, in addition to the amounts necessary to meet the minimum
risk-based capital requirements described above.

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

We use two sets of standard scenarios to measure net interest income at risk.
For the 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 March
31, 2021, the Bank has met all minimum regulatory capital requirements to be
considered "well capitalized", reference footnote 7 to the consolidated
financial statements for more detail.

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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 March 31,
2021 and December 31, 2020:
Parallel Ramp
                                                         Estimated Percent Change in Net Interest Income
Rate Changes (basis points)                               March 31, 2021               December 31, 2020
-100                                                                 (0.60) %                       0.20  %
+200                                                                 (1.60)                        (1.40)




Parallel Shock
                                                         Estimated Percent Change in Net Interest Income
Rate Changes (basis points)                               March 31, 2021               December 31, 2020
-100                                                                 (1.30) %                      (0.30) %
+100                                                                 (0.90)                        (1.00)
+200                                                                 (1.40)                        (1.70)
+300                                                                 (1.40)                        (2.00)



The net interest income at risk simulation results indicate that, as of March
31, 2021, 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.

The benchmark 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 baseline scenario assumes that future interest rates remain unchanged.

The following table shows the estimated percentage change in our economic value of equity at risk, assuming various changes in interest rates:

                                                      Estimated Percent 

Change in the economic value of equity

(“EVE”)

Rate Changes (basis points)                               March 31, 2021               December 31, 2020
-100                                                                (26.80) %                     (47.30) %
+100                                                                  3.80                          9.30
+200                                                                  5.10                         13.80
+300                                                                  7.00                         18.40



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. In the
minus 100 scenario above, the change in EVE of (26.8)% is outside of policy
parameters. However, because the Bank continues to be well-capitalized, the
downward rate scenarios are extremely unlikely in
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the current economic environment and interest rates. The result of this simulation has been discussed with the ALCO committee and the Company has decided not to take any further action at this time.

It should be noted that the static balance sheet assumption does not necessarily
reflect our expectation for future balance sheet growth, which is a function of
the business environment and customer behavior. Another significant simulation
assumption is the sensitivity of core deposits to fluctuations in interest
rates. Income simulation results assume that changes in both core savings
deposit rates and balances are related to changes in short-term interest rates.
Lastly, mortgage-backed securities and mortgage loans involve a level of risk
that unforeseen changes in prepayment speeds may cause related cash flows to
vary significantly in differing rate environments. Such changes could affect the
level of reinvestment risk associated with cash flow from these instruments, as
well as their market value. Changes in prepayment speeds could also increase or
decrease the amortization of premium or accretion of discounts related to such
instruments, thereby affecting interest income.

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