UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2015 | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________to_____________ |
Commission File Number: 001-36448
Bankwell
Financial Group, Inc.
(Exact Name of Registrant as specified in its Charter)
Connecticut | 20-8251355 | |
(State or other jurisdiction of | (I.R.S. Employer | |
Incorporation or organization) | Identification No.) | |
220 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) |
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. R Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). R Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer R | |
Non-accelerated filer ☐ | (Do not check if a smaller reporting company) | Smaller reporting company ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes R No
As of July 31, 2015, there were 7,240,704 shares of the registrant’s common stock outstanding.
Bankwell Financial
Group, Inc.
Form 10-Q
Table of Contents
PART 1 – FINANCIAL
INFORMATION
Item 1.
Financial Statements
Bankwell
Financial Group, Inc.
Consolidated
Balance Sheets - (unaudited)
(Dollars
in thousands, except share data)
June 30, | December 31, | ||||||
2015 | 2014 | ||||||
ASSETS | |||||||
Cash and due from banks | $ | 75,550 | $ | 48,559 | |||
Held to maturity investment securities, at amortized cost | 11,341 | 11,454 | |||||
Available for sale investment securities, at fair value | 46,883 | 65,009 | |||||
Loans held for sale | - | 586 | |||||
Loans receivable (net of allowance for loan losses of $12,230 at June 30, 2015 and $10,860 at December 31, 2014) | 1,021,693 | 915,981 | |||||
Foreclosed real estate | 830 | 950 | |||||
Accrued interest receivable | 3,575 | 3,323 | |||||
Federal Home Loan Bank stock, at cost | 6,918 | 6,109 | |||||
Premises and equipment, net | 11,868 | 11,910 | |||||
Bank-owned life insurance | 23,395 | 23,028 | |||||
Goodwill | 2,589 | 2,589 | |||||
Other intangible assets | 745 | 848 | |||||
Deferred income taxes, net | 7,869 | 7,156 | |||||
Other assets | 1,418 | 2,029 | |||||
Total assets | $ | 1,214,674 | $ | 1,099,531 | |||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
Liabilities | |||||||
Deposits | |||||||
Noninterest bearing deposits | $ | 162,546 | $ | 166,030 | |||
Interest bearing deposits | 789,035 | 669,409 | |||||
Total deposits | 951,581 | 835,439 | |||||
Advances from the Federal Home Loan Bank | 124,000 | 129,000 | |||||
Accrued expenses and other liabilities | 5,424 | 5,882 | |||||
Total liabilities | 1,081,005 | 970,321 | |||||
Commitments and Contingencies | - | - | |||||
Shareholders’ equity | |||||||
Preferred stock, senior noncumulative perpetual, Series C, no par; 10,980 shares issued at June 30, 2015 and December 31, 2014, respectively; liquidation value of $1,000 per share | 10,980 | 10,980 | |||||
Common stock, no par value; 10,000,000 shares authorized, 7,240,704 and 7,185,482 shares issued at June 30, 2015 and December 31, 2014, respectively | 108,038 | 107,265 | |||||
Retained earnings | 14,538 | 10,434 | |||||
Accumulated other comprehensive income | 113 | 531 | |||||
Total shareholders’ equity | 133,669 | 129,210 | |||||
Total liabilities and shareholders’ equity | $ | 1,214,674 | $ | 1,099,531 |
3 |
Bankwell Financial
Group, Inc.
Consolidated Statements of Income – (unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||
Interest and dividend income | |||||||||||||
Interest and fees on loans | $ | 11,897 | $ | 7,558 | $ | 22,653 | $ | 14,986 | |||||
Interest and dividends on securities | 474 | 437 | 978 | 848 | |||||||||
Interest on cash and cash equivalents | 17 | 49 | 29 | 71 | |||||||||
Total interest income | 12,388 | 8,044 | 23,660 | 15,905 | |||||||||
Interest expense | |||||||||||||
Interest expense on deposits | 1,231 | 730 | 2,269 | 1,352 | |||||||||
Interest on borrowings | 416 | 166 | 757 | 259 | |||||||||
Total interest expense | 1,647 | 896 | 3,026 | 1,611 | |||||||||
Net interest income | 10,741 | 7,148 | 20,634 | 14,294 | |||||||||
Provision for loan losses | 654 | 70 | 1,387 | 282 | |||||||||
Net interest income after provision for loan losses | 10,087 | 7,078 | 19,247 | 14,012 | |||||||||
Noninterest income | |||||||||||||
Gains and fees from sales of loans | 349 | 213 | 438 | 642 | |||||||||
Service charges and fees | 233 | 143 | 441 | 267 | |||||||||
Bank owned life insurance | 185 | 86 | 368 | 171 | |||||||||
Gain on sale of foreclosed real estate, net | - | - | 18 | - | |||||||||
Other | 87 | 240 | 187 | 372 | |||||||||
Total noninterest income | 854 | 682 | 1,452 | 1,452 | |||||||||
Noninterest expense | |||||||||||||
Salaries and employee benefits | 4,057 | 3,284 | 8,019 | 6,625 | |||||||||
Occupancy and equipment | 1,310 | 1,030 | 2,659 | 2,096 | |||||||||
Data processing | 405 | 300 | 741 | 639 | |||||||||
Professional services | 369 | 272 | 694 | 641 | |||||||||
Marketing | 271 | 218 | 418 | 328 | |||||||||
FDIC insurance | 163 | 107 | 321 | 225 | |||||||||
Director fees | 141 | 143 | 289 | 282 | |||||||||
Amortization of intangibles | 51 | 27 | 102 | 54 | |||||||||
Foreclosed real estate | 6 | - | 10 | 12 | |||||||||
Merger and acquisition related expenses | - | 122 | - | 263 | |||||||||
Other | 607 | 394 | 1,097 | 774 | |||||||||
Total noninterest expense | 7,380 | 5,897 | 14,350 | 11,939 | |||||||||
Income before income tax expense | 3,561 | 1,863 | 6,349 | 3,525 | |||||||||
Income tax expense | 1,275 | 636 | 2,190 | 1,175 | |||||||||
Net income | $ | 2,286 | $ | 1,227 | $ | 4,159 | $ | 2,350 | |||||
Net income attributable to common shareholders | $ | 2,259 | $ | 1,200 | $ | 4,104 | $ | 2,295 | |||||
Earnings Per Common Share: | |||||||||||||
Basic | $ | 0.31 | $ | 0.23 | $ | 0.57 | $ | 0.51 | |||||
Diluted | $ | 0.31 | $ | 0.23 | $ | 0.57 | $ | 0.51 | |||||
Weighted Average Common Shares Outstanding: | |||||||||||||
Basic | 7,042,290 | 5,022,836 | 7,035,432 | 4,395,914 | |||||||||
Diluted | 7,056,916 | 5,045,003 | 7,056,566 | 4,423,931 |
4 |
Bankwell Financial
Group, Inc.
Consolidated Statements of Comprehensive Income – (unaudited)
(In thousands)
Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||
Net income | $ | 2,286 | $ | 1,227 | $ | 4,159 | $ | 2,350 | |||||
Other comprehensive income (loss): | |||||||||||||
Unrealized (losses) gains on securities: | |||||||||||||
Unrealized holding (losses) gains on available for sale securities | (778 | ) | 188 | (452 | ) | 433 | |||||||
Reclassification adjustment for (gain) loss realized in net income | - | - | - | - | |||||||||
Net change in unrealized (loss) gain | (778 | ) | 188 | (452 | ) | 433 | |||||||
Income tax benefit (expense) | 303 | (73 | ) | 176 | (168 | ) | |||||||
Unrealized (losses) gains on securities, net of tax | (475 | ) | 115 | (276 | ) | 265 | |||||||
Unrealized gains (losses) on interest rate swaps: | |||||||||||||
Unrealized gains (losses) on interest rate swaps designated as cash flow hedge | 336 | (195 | ) | (232 | ) | (108 | ) | ||||||
Income tax (expense) benefit | (131 | ) | 76 | 90 | 42 | ||||||||
Unrealized gains (losses) on interest rate swap, net of tax | 205 | (119 | ) | (142 | ) | (66 | ) | ||||||
Total other comprehensive (loss) income | (270 | ) | (4 | ) | (418 | ) | 199 | ||||||
Comprehensive income | $ | 2,016 | $ | 1,223 | $ | 3,741 | $ | 2,549 |
5 |
Bankwell
Financial Group, Inc.
Consolidated
Statements of Shareholders’ Equity – (unaudited)
(In thousands, except share data)
Number of Outstanding Shares |
Preferred Stock |
Common Stock |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Total | ||||||||||||||
Balance at December 31, 2014 | 7,185,482 | $ | 10,980 | $ | 107,265 | $ | 10,434 | $ | 531 | $ | 129,210 | ||||||||
Net income | - | - | - | 4,159 | - | 4,159 | |||||||||||||
Other comprehensive loss, net of tax | - | - | - | - | (418 | ) | (418 | ) | |||||||||||
Preferred stock cash dividends | - | - | - | (55 | ) | - | (55 | ) | |||||||||||
Stock-based compensation expense | - | - | 515 | - | - | 515 | |||||||||||||
Forfeitures of restricted stock | (2,548 | ) | - | - | - | - | - | ||||||||||||
Issuance of restricted stock | 40,000 | - | - | - | - | - | |||||||||||||
Stock options exercised | 17,770 | - | 258 | - | - | 258 | |||||||||||||
Balance at June 30, 2015 | 7,240,704 | $ | 10,980 | $ | 108,038 | $ | 14,538 | $ | 113 | $ | 133,669 |
Number of Outstanding Shares |
Preferred Stock |
Common Stock |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Total | ||||||||||||||
Balance at December 31, 2013 | 3,876,393 | $ | 10,980 | $ | 52,105 | $ | 5,976 | $ | 424 | $ | 69,485 | ||||||||
Net income | - | - | - | 2,350 | - | 2,350 | |||||||||||||
Other comprehensive income, net of tax | - | - | - | - | 199 | 199 | |||||||||||||
Preferred stock cash dividends | - | - | - | (55 | ) | - | (55 | ) | |||||||||||
Stock-based compensation expense | - | - | 280 | - | - | 280 | |||||||||||||
Forfeitures of restricted stock | (5,916 | ) | - | - | - | - | - | ||||||||||||
Stock options exercised | 20,305 | - | 207 | - | - | 207 | |||||||||||||
Issuance of 2,702,703 shares, net of expenses | 2,702,703 | - | 44,704 | - | - | 44,704 | |||||||||||||
Balance at June 30, 2014 | 6,593,485 | $ | 10,980 | $ | 97,296 | $ | 8,271 | $ | 623 | $ | 117,170 |
6 |
Bankwell Financial
Group, Inc.
Consolidated Statements of Cash flows – (unaudited)
(In thousands)
Six Months Ended June 30, |
|||||||
2015 | 2014 | ||||||
Cash flows from operating activities | |||||||
Net income | $ | 4,159 | $ | 2,350 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Net amortization of premiums and discounts on investment securities | 66 | 46 | |||||
Provision for loan losses | 1,387 | 282 | |||||
(Provision) benefit for deferred taxes | (536 | ) | 116 | ||||
Depreciation and amortization | 833 | 497 | |||||
Increase in cash surrender value of bank-owned life insurance | (367 | ) | (171 | ) | |||
Loan principal sold | (7,174 | ) | (20,266 | ) | |||
Proceeds from sales of loans | 8,198 | 18,878 | |||||
Net gain on sales of loans | (438 | ) | (642 | ) | |||
Equity-based compensation | 515 | 280 | |||||
Net accretion of purchase accounting adjustments | (77 | ) | (296 | ) | |||
Gain on sale of foreclosed real estate | (18 | ) | - | ||||
Net change in: | |||||||
Deferred loan fees | 347 | 332 | |||||
Accrued interest receivable | (251 | ) | (104 | ) | |||
Other assets | 673 | (614 | ) | ||||
Accrued expenses and other liabilities | (458 | ) | 315 | ||||
Net cash provided by operating activities | 6,859 | 1,003 | |||||
Cash flows from investing activities | |||||||
Proceeds from principal repayments on available for sale securities | 583 | 202 | |||||
Proceeds from principal repayments on held to maturity securities | 108 | 70 | |||||
Net proceeds from sales and calls of available for sale securities | 17,030 | 400 | |||||
Purchases of available for sale securities | - | (18,200 | ) | ||||
Net increase in loans | (107,551 | ) | (49,940 | ) | |||
Purchases of premises and equipment | (791 | ) | (1,515 | ) | |||
Purchase of Federal Home Loan Bank stock | (809 | ) | - | ||||
Proceeds from sale of foreclosed real estate | 138 | - | |||||
Net cash used by investing activities | (91,292 | ) | (68,983 | ) |
7 |
Consolidated Statements
of Cash flows - (continued)
(In thousands)
Six Months Ended June 30, |
|||||||
2015 | 2014 | ||||||
Cash flows from financing activities | |||||||
Net change in time certificates of deposit | $ | 39,449 | $ | 63,018 | |||
Net change in other deposits | 76,772 | 5,628 | |||||
Net change in FHLB advances | (5,000 | ) | 3,000 | ||||
Proceeds from issuance of common stock | - | 44,704 | |||||
Proceeds from exercise of options | 258 | 207 | |||||
Dividends paid on preferred stock | (55 | ) | (55 | ) | |||
Net cash provided by financing activities | 111,424 | 116,502 | |||||
Net increase in cash and cash equivalents | 26,991 | 48,522 | |||||
Cash and cash equivalents: | |||||||
Beginning of year | 48,559 | 82,013 | |||||
End of period | $ | 75,550 | $ | 130,535 | |||
Supplemental disclosures of cash flows information: | |||||||
Cash paid for: | |||||||
Interest | $ | 2,878 | $ | 1,720 | |||
Income taxes | $ | 2,491 | $ | 630 |
8 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
1. | Nature of operations and summary of significant accounting policies |
Bankwell Financial Group, Inc. (the “Company” or “Bankwell”) is a bank holding company headquartered in New Canaan, Connecticut. The Company offers a broad range of financial services through its banking subsidiary, Bankwell Bank, (the “Bank”). The Bank was originally chartered as two separate banks, The Bank of New Canaan (“BNC”) and The Bank of Fairfield (“TBF”). In September 2013, BNC and TBF were merged and rebranded as “Bankwell Bank.” In November 2013, the Bank acquired The Wilton Bank (“Wilton”), which added one branch and approximately $25.1 million in loans and $64.2 million in deposits. In October 2014, the Bank acquired Quinnipiac Bank and Trust Company (“Quinnipiac”) which added two branches and approximately $97.8 million in loans and $100.6 million in deposits.
The Bank is a Connecticut state chartered commercial bank, founded in 2002, whose deposits are insured under the Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation (“FDIC”). The Bank provides a full range of banking services to commercial and consumer customers, primarily concentrated in the Fairfield County and New Haven County regions of Connecticut, with branch locations in New Canaan, Stamford, Fairfield, Wilton, Norwalk, Hamden and North Haven, Connecticut.
Principles of consolidation
The consolidated interim financial statements include the accounts of the Company and the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and general practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities as of the date of the 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 fair value of acquired assets, the allowance for loan losses, stock-based compensation and derivative instrument valuation.
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 10-1 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, 2015. 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, 2014.
Significant concentrations of credit risk
Most of the Company’s activities are with customers located within Fairfield County and the surrounding region of Connecticut, and declines in property values in these areas could significantly impact the Company. The Company has significant concentrations in commercial real estate loans. Management does not believe they present any special risk. The Company does not have any significant concentrations in any one industry or customer.
9 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
Reclassification
Certain prior period amounts have been reclassified to conform to the 2015 financial statement presentation. These reclassifications only changed the reporting categories and did not affect the results of operations or consolidated financial position.
Recent accounting pronouncements
The following section includes changes in accounting principles and potential effects of new accounting guidance and pronouncements.
ASU No. 2014-01 - Investments - Equity Method and Joint Ventures (Topic 323) – “Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force)”. The ASU permits an entity to make an accounting policy election to account for its investment in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportionate amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The decision to apply the proportionate amortization method of accounting should be applied consistently to all qualifying affordable housing project investments. A reporting entity that uses the effective yield or other method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply such method to those preexisting investments. The amendments were effective for the Company on January 1, 2015. This ASU did not impact the Company’s financial statements and the Company does not expect the application of this guidance will have a material impact on the Company’s financial statements in the future.
ASU No. 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) – “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force)”. The ASU clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (i) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (ii) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar agreement. In addition, the amendments require disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure in accordance with local requirements of the applicable jurisdiction. An entity can elect to adopt the amendments using either a modified retrospective method or a prospective transition method. The amendments were effective for the Company on January 1, 2015. This ASU did not impact the Company’s financial statements and the Company does not expect the application of this guidance will have a material impact on the Company’s financial statements in the future.
ASU No. 2014-09 - Revenue from Contracts with Customers (Topic 606). The ASU establishes a single comprehensive model for an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled, and will supersede nearly all existing revenue recognition guidance, to clarify and converge revenue recognition principles under US GAAP and IFRS. The update outlines five steps to recognizing revenue: (i) identify the contracts with the customer; (ii) identify the separate performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the separate performance obligations; (v) recognize revenue when each performance obligation is satisfied. The update requires more comprehensive disclosures, relating to quantitative and qualitative information for amounts, timing, the nature and uncertainty of revenue, and cash flows arising from contracts with customers, which will mainly impact construction and high-tech industries. The most significant potential impact to banking entities relates to less prescriptive derecognition requirements on the sale of OREO property. The amendments are effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted for annual and interim reporting periods beginning after December 15, 2016. An entity may elect either a full retrospective or a modified retrospective application. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements.
10 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
ASU No. 2014-12, Compensation-Stock Compensation (Topic 718) - “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force)”. The ASU provides explicit guidance to account for a performance target that could be achieved after the requisite service period as a performance condition. For awards within the scope of this Update, the Task Force decided that an entity should apply existing guidance in Topic 718 as it relates to share-based payments with performance conditions that affect vesting. Consistent with that guidance, performance conditions that affect vesting should not be reflected in estimating the fair value of an award at the grant date. Compensation cost should be recognized when it is probable that the performance target will be achieved and should represent the compensation cost attributable to the period for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The amendments are effective for annual and interim periods beginning after January 1, 2016. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements.
ASU No. 2014-14, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40) – “Classification of Certain Government-Guaranteed Residential Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force)”. The ASU has been issued to reduce diversity in practice in the classification of foreclosed residential mortgage loans held by creditors that are fully guaranteed under certain government programs, including the Federal Housing Administration guarantees. A residential mortgage loan would be derecognized and a separate other receivable would be recognized upon foreclosure if the loan has both of the following characteristics: (i) the loan has a government guarantee that is not separable from the loan before foreclosure entitling the creditor to the full unpaid principal balance of the loan; and (ii) at the time of foreclosure, the creditor has the intent to make a claim on the guarantee and the ability to recover the full unpaid principal balance of the loan through the guarantee. Notably, upon foreclosure, the separate other receivable would be measured based on the current amount of the loan balance expected to be recovered under the guarantee. The amendments were effective for the Company on January 1, 2015. This ASU did not impact the Company’s financial statements and the Company does not expect the application of this guidance will have a material impact on the Company’s financial statements in the future.
ASU No. 2014-17, Business Combinations (Topic 805) – “Pushdown Accounting (a consensus of the FASB Emerging Issues Task Force)”. Current generally accepted accounting principles (GAAP) offer limited guidance for determining whether and at what threshold an acquiree (acquired entity) can reflect the acquirer’s accounting and reporting basis (pushdown accounting) in its separate financial statements. The objective of this ASU is to provide guidance on whether and at what threshold an acquired entity that is a business or nonprofit activity can apply pushdown accounting in its separate financial statements. The amendments in this Update provide an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. The amendments in this ASU were effective on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. This ASU did not impact the Company’s financial statements and the Company does not expect the application of this guidance will have a material impact on the Company’s financial statements in the future.
11 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
ASU No. 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20) – “Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items”. Under the existing guidance, an entity is required to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event or transaction is of an unusual nature and occurs infrequently. Under this ASU, separate, net-of-tax presentation (and corresponding earnings per share impact) will no longer be allowed. The existing requirement to separately present items that are of an unusual nature or occur infrequently on a pre-tax basis within income from continuing operations has been retained. The new guidance also requires similar separate presentation of items that are both unusual and infrequent. The standard is effective for both public and private companies for periods beginning after December 15, 2015. Early adoption is permitted, but only as of the beginning of the fiscal year of adoption. Upon adoption, a reporting entity may elect prospective or retrospective application. If adopted prospectively, both the nature and amount of any subsequent adjustments to previously reported extraordinary items must be disclosed. The Company does not expect the application of this guidance will have a material impact on the Company’s financial statements.
ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This ASU is intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). The ASU focuses on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Account Standards Codification (ASC) and improves current GAAP by: 1) placing more emphasis on risk of loss when determining a controlling financial interest. A reporting organization may no longer have to consolidate a legal entity in certain circumstances based solely on its fee arrangement, when certain criteria are met; 2) reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (VIE); and 3) changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs. The amendments are effective for annual and interim periods beginning after December 15, 2015. An entity can elect to adopt the amendments using either a full retrospective method or a modified retrospective method. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements.
ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-20): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments are effective for annual and interim periods beginning after December 15, 2015. The amendments should be applied on a retrospective basis and the necessary disclosures for a change in an accounting principle should be made. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements.
12 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
2. | investment securities |
The amortized cost, gross unrealized gains and losses and fair values of available for sale and held to maturity securities at June 30, 2015 were as follows:
June 30, 2015 | ||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(In thousands) | ||||||||||||||||
Available for sale securities: | ||||||||||||||||
U.S. Government and agency obligations | ||||||||||||||||
Due in less than one year | $ | 499 | $ | 4 | $ | - | $ | 503 | ||||||||
Due from one through five years | 4,099 | - | (41 | ) | 4,058 | |||||||||||
Due from five through ten years | 2,828 | 11 | (27 | ) | 2,812 | |||||||||||
Due after ten years | 799 | 1 | (27 | ) | 773 | |||||||||||
8,225 | 16 | (95 | ) | 8,146 | ||||||||||||
State agency and municipal obligations | ||||||||||||||||
Due from one through five years | 522 | 40 | - | 562 | ||||||||||||
Due from five through ten years | 8,279 | 149 | (269 | ) | 8,159 | |||||||||||
Due after ten years | 8,989 | 438 | (54 | ) | 9,373 | |||||||||||
17,790 | 627 | (323 | ) | 18,094 | ||||||||||||
Corporate bonds | ||||||||||||||||
Due in less than one year | 3,991 | 11 | (2 | ) | 4,000 | |||||||||||
Due from one through five years | 6,093 | 226 | - | 6,319 | ||||||||||||
Due from five through ten years | 5,208 | 18 | - | 5,226 | ||||||||||||
15,292 | 255 | (2 | ) | 15,545 | ||||||||||||
Government-sponsored mortgage backed securities | ||||||||||||||||
Due from one through five years | 83 | - | - | 83 | ||||||||||||
Due after ten years | 4,890 | 135 | (10 | ) | 5,015 | |||||||||||
4,973 | 135 | (10 | ) | 5,098 | ||||||||||||
Total available for sale securities | $ | 46,280 | $ | 1,033 | $ | (430 | ) | $ | 46,883 | |||||||
Held to maturity securities: | ||||||||||||||||
U.S. Government and agency obligations | ||||||||||||||||
Due in less than one year | $ | 1,005 | $ | 1 | $ | - | $ | 1,006 | ||||||||
State agency and municipal obligations | ||||||||||||||||
Due after ten years | 9,101 | - | - | 9,101 | ||||||||||||
Corporate bonds | ||||||||||||||||
Due from five through ten years | 1,000 | - | (35 | ) | 965 | |||||||||||
Government-sponsored mortgage backed securities | ||||||||||||||||
Due after ten years | 235 | 30 | - | 265 | ||||||||||||
Total held to maturity securities | $ | 11,341 | $ | 31 | $ | (35 | ) | $ | 11,337 |
13 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Unaudited)
The amortized cost, gross unrealized gains and losses and fair values of available for sale and held to maturity securities at December 31, 2014 were as follows:
December 31, 2014 | ||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(In thousands) | ||||||||||||||||
Available for sale securities: | ||||||||||||||||
U.S. Government and agency obligations | ||||||||||||||||
Due in less than one year | $ | 497 | $ | 9 | $ | - | $ | 506 | ||||||||
Due from one through five years | 3,998 | - | (69 | ) | 3,929 | |||||||||||
Due from five through ten years | 17,055 | 27 | (79 | ) | 17,003 | |||||||||||
Due after ten years | 3,004 | 4 | (28 | ) | 2,980 | |||||||||||
24,554 | 40 | (176 | ) | 24,418 | ||||||||||||
State agency and municipal obligations | ||||||||||||||||
Due from five through ten years | 9,297 | 295 | (48 | ) | 9,544 | |||||||||||
Due after ten years | 8,500 | 544 | (4 | ) | 9,040 | |||||||||||
17,797 | 839 | (52 | ) | 18,584 | ||||||||||||
Corporate bonds | ||||||||||||||||
Due in less than one year | 5,764 | 44 | (6 | ) | 5,802 | |||||||||||
Due from one through five years | 4,150 | 268 | - | 4,418 | ||||||||||||
Due from five through ten years | 6,121 | 8 | (24 | ) | 6,105 | |||||||||||
16,035 | 320 | (30 | ) | 16,325 | ||||||||||||
Government-sponsored mortgage backed securities | ||||||||||||||||
Due from one through five years | 99 | 1 | - | 100 | ||||||||||||
Due after ten years | 5,468 | 131 | (17 | ) | 5,582 | |||||||||||
5,567 | 132 | (17 | ) | 5,682 | ||||||||||||
Total available for sale securities | $ | 63,953 | $ | 1,331 | $ | (275 | ) | $ | 65,009 | |||||||
Held to maturity securities: | ||||||||||||||||
U.S. Government and agency obligations | ||||||||||||||||
Due in less than one year | $ | 1,010 | $ | - | $ | - | $ | 1,010 | ||||||||
State agency and municipal obligations | ||||||||||||||||
Due after ten years | 9,179 | - | - | 9,179 | ||||||||||||
Corporate bonds | ||||||||||||||||
Due from five through ten years | 1,000 | - | (15 | ) | 985 | |||||||||||
Government-sponsored mortgage backed securities | ||||||||||||||||
Due after ten years | 265 | 31 | - | 296 | ||||||||||||
Total held to maturity securities | $ | 11,454 | $ | 31 | $ | (15 | ) | $ | 11,470 | |||||||
14 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
There were no sales of, or realized gains or losses on investment securities during the three and six months ended June 30, 2015 and 2014.
At both June 30, 2015 and December 31, 2014, securities with approximate fair values of $5.9 million were pledged as collateral for public deposits.
The following table provides information regarding investment securities with unrealized losses, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position at June 30, 2015 and December 31, 2014:
Length of Time in Continuous Unrealized Loss Position | |||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
||||||||||||||
(In thousands) | |||||||||||||||||||
June 30, 2015 | |||||||||||||||||||
U.S. Government and agency obligations | $ | 5,186 | $ | (59 | ) | $ | 1,964 | $ | (36 | ) | $ | 7,150 | $ | (95 | ) | ||||
State agency and municipal obligations | 4,934 | (323 | ) | - | - | 4,934 | (323 | ) | |||||||||||
Corporate bonds | 1,000 | (35 | ) | 998 | (2 | ) | 1,998 | (37 | ) | ||||||||||
Government-sponsored mortgage backed securities | 1,100 | (10 | ) | - | - | 1,100 | (10 | ) | |||||||||||
Total investment securities | $ | 12,220 | $ | (427 | ) | $ | 2,962 | $ | (38 | ) | $ | 15,182 | $ | (465 | ) | ||||
December 31, 2014 | |||||||||||||||||||
U.S. Government and agency obligations | $ | 4,515 | $ | (56 | ) | $ | 5,878 | $ | (120 | ) | $ | 10,393 | $ | (176 | ) | ||||
State agency and municipal obligations | 1,771 | (52 | ) | - | - | 1,771 | (52 | ) | |||||||||||
Corporate bonds | 6,783 | (40 | ) | 995 | (5 | ) | 7,778 | (45 | ) | ||||||||||
Government-sponsored mortgage backed securities | 1,406 | (17 | ) | - | - | 1,406 | (17 | ) | |||||||||||
Total investment securities | $ | 14,475 | $ | (165 | ) | $ | 6,873 | $ | (125 | ) | $ | 21,348 | $ | (290 | ) |
There were 40 and 42 investment securities as of June 30, 2015 and December 31 2014, respectively, in which the fair value of the security was less than the amortized cost of the security.
The U.S. Government and agency obligations owned are either direct obligations of the U.S. Government or are issued by one of the shareholder-owned corporations chartered by the U.S. Government and therefore the contractual cash flows are guaranteed and as a result the unrealized losses in this portfolio are not considered other than temporarily impaired.
The Company continually monitors its municipal bond and corporate bond portfolios and at this time these portfolios have minimal default risk because corporate and municipal bonds are all rated above investment grade except for one municipal bond with a face value of $1.0 million that is rated two notches below investment grade. The Company has determined that all unrealized losses on all securities that are investment grade are not other than temporarily impaired. The Company has determined that the unrealized loss on the municipal bond that is below investment grade is not other than temporarily impaired due to the short duration of loss and the small amount of the unrealized loss in relation to the cost basis.
15 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Government-sponsored mortgage backed securities are fully guaranteed by U.S. Government agencies and as a result the unrealized losses in this portfolio are not considered other than temporarily impaired.
3. | loans receivable and allowance for loan losses |
Loans acquired in connection with the Wilton acquisition in November 2013 and the Quinnipiac acquisition in October 2014 are referred to as “acquired” loans as a result of the manner in which they are accounted for. All other loans are referred to as “originated” loans. Accordingly, selected credit quality disclosures that follow are presented separately for the originated loan portfolio and the acquired loan portfolio.
The following table sets forth a summary of the loan portfolio at June 30, 2015 and December 31, 2014:
June 30, 2015 | December 31, 2014 | ||||||||||||||||||
(In thousands) | Originated | Acquired | Total | Originated | Acquired | Total | |||||||||||||
Real estate loans: | |||||||||||||||||||
Residential | $ | 172,541 | $ | 3,809 | $ | 176,350 | $ | 169,833 | $ | 5,198 | $ | 175,031 | |||||||
Commercial | 573,995 | 52,947 | 626,942 | 458,506 | 62,675 | 521,181 | |||||||||||||
Construction | 63,431 | 1,120 | 64,551 | 62,258 | 971 | 63,229 | |||||||||||||
Home equity | 8,526 | 8,312 | 16,838 | 10,226 | 7,940 | 18,166 | |||||||||||||
818,493 | 66,188 | 884,681 | 700,823 | 76,784 | 777,607 | ||||||||||||||
Commercial business | 121,435 | 28,841 | 150,276 | 120,360 | 28,899 | 149,259 | |||||||||||||
Consumer | 293 | 1,942 | 2,235 | 243 | 2,653 | 2,896 | |||||||||||||
Total loans | 940,221 | 96,971 | 1,037,192 | 821,426 | 108,336 | 929,762 | |||||||||||||
Allowance for loan losses | (12,220 | ) | (10 | ) | (12,230 | ) | (10,860 | ) | - | (10,860 | ) | ||||||||
Deferred loan origination fees, net | (3,284 | ) | - | (3,284 | ) | (2,937 | ) | - | (2,937 | ) | |||||||||
Unamortized loan premiums | 15 | - | 15 | 16 | - | 16 | |||||||||||||
Loans receivable, net | $ | 924,732 | $ | 96,961 | $ | 1,021,693 | $ | 807,645 | $ | 108,336 | $ | 915,981 |
Lending activities are conducted principally in the Fairfield and New Haven county regions of Connecticut, and consist of residential and commercial real estate loans, commercial business loans and a variety of consumer loans. Loans may also be granted for the construction of residential homes and commercial properties. All residential and commercial mortgage loans are collateralized by first or second mortgages on real estate.
Certain acquired loans were determined to have evidence of credit deterioration at the acquisition date. Such loans are accounted for in accordance with ASC 310-30.
16 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
The following tables summarize activity in the accretable yields for the acquired loan portfolio that falls under the purview of ASC 310-30:
(In thousands) | Three Months Ended June 30, | ||||||
2015 | 2014 | ||||||
Balance at beginning of period | $ | 1,225 | $ | 1,228 | |||
Acquisition | - | - | |||||
Accretion | (21 | ) | (117 | ) | |||
Other (a) | (70 | ) | (294 | ) | |||
Balance at end of period | $ | 1,134 | $ | 817 |
a) | Represents changes in cash flows expected to be collected due to loan sales or payoffs. |
(In thousands) | Six Months Ended June 30, | ||||||
2015 | 2014 | ||||||
Balance at beginning of period | $ | 1,382 | $ | 1,418 | |||
Acquisition | - | - | |||||
Accretion | (116 | ) | (257 | ) | |||
Other (a) | (132 | ) | (344 | ) | |||
Balance at end of period | $ | 1,134 | $ | 817 |
a) | Represents changes in cash flows expected to be collected due to loan sales or payoffs. |
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, in most cases, extends credit of up to 80% of the market value of the collateral, depending on the borrowers’ creditworthiness and the type of collateral. The market value of collateral is monitored on an ongoing basis and additional collateral is obtained when warranted. 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 to be based on the borrower’s ability to generate continuing cash flows. The Company’s policy for residential lending allows that, generally, the amount of the loan may not exceed 80% of the original appraised value of the property. In certain situations, the amount may be up to 90-95% 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, a religious or civic organization. Private mortgage insurance is required for that portion of the residential first mortgage loan in excess of 80% of the appraised value of the property.
Credit quality of loans and the allowance for loan losses
Management segregates the loan portfolio into portfolio segments which is defined as the level at which the Company develops and documents a systematic method for determining its allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate.
17 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
The Company’s loan portfolio is segregated into the following portfolio segments:
Residential Real Estate: This portfolio segment consists of the origination of first mortgage loans secured by one-to four-family owner occupied residential properties and residential construction loans to individuals to finance the construction of residential dwellings for personal use located in our market area.
Commercial Real Estate: This portfolio segment includes loans secured by commercial real estate, non-owner occupied one-to four-family and multi-family dwellings for property owners and businesses in our market area. 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 condominiums, apartment buildings, and single family subdivisions as well as office buildings, retail and other income producing properties and land loans, which are loans made with land as security. Construction and land development financing generally involves greater credit risk than long-term financing on improved, owner-occupied 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. 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 with debt service which exposes the Company to greater risk of non-payment and loss.
Home Equity: This portfolio segment primarily includes home equity loans and home equity lines of credit secured by owner occupied one-to four-family residential properties. Loans of this type are written at a 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 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 may involve higher average balances, 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.
Consumer: This portfolio segment includes loans secured by savings or certificate accounts, or automobiles, as well as unsecured personal loans and overdraft lines of credit. This type of loan entails greater risk than residential mortgage loans, particularly in the case of loans that are unsecured or secured by assets that depreciate rapidly.
An unallocated component is maintained, when needed, to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. The unallocated allowance is used to provide for an unidentified loss that may exist in emerging problem loans that cannot be fully quantified or may be affected by conditions not fully understood as of the balance sheet date.
18 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
Allowance for loan losses
The following tables set forth the activity in the Company’s allowance for loan losses for the three and six months ended June 30, 2015 and 2014, by portfolio segment:
Residential Real Estate |
Commercial Real Estate |
Construction | Home Equity |
Commercial Business |
Consumer | Unallocated | Total | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||
Three Months Ended June 30, 2015 | |||||||||||||||||||||||||
Originated | |||||||||||||||||||||||||
Beginning balance | $ | 1,406 | $ | 6,067 | $ | 1,220 | $ | 203 | $ | 2,682 | $ | 3 | $ | - | $ | 11,581 | |||||||||
Charge-offs | - | - | - | - | - | - | - | - | |||||||||||||||||
Recoveries | - | - | - | - | - | - | - | - | |||||||||||||||||
Provisions | 48 | 765 | (82 | ) | (34 | ) | (64 | ) | 6 | - | 639 | ||||||||||||||
Ending balance | $ | 1,454 | $ | 6,832 | $ | 1,138 | $ | 169 | $ | 2,618 | $ | 9 | $ | - | $ | 12,220 | |||||||||
Acquired | |||||||||||||||||||||||||
Beginning balance | $ | - | $ | - | $ | - | $ | - | $ | 12 | $ | 3 | $ | - | $ | 15 | |||||||||
Charge-offs | - | - | - | - | (15 | ) | (6 | ) | - | (21 | ) | ||||||||||||||
Recoveries | - | - | - | - | - | 1 | - | 1 | |||||||||||||||||
Provisions | - | - | - | - | 13 | 2 | - | 15 | |||||||||||||||||
Ending balance | $ | - | $ | - | $ | - | $ | - | $ | 10 | $ | - | $ | - | $ | 10 | |||||||||
Total | |||||||||||||||||||||||||
Beginning balance | $ | 1,406 | $ | 6,067 | $ | 1,220 | $ | 203 | $ | 2,694 | $ | 6 | $ | - | $ | 11,596 | |||||||||
Charge-offs | - | - | - | - | (15 | ) | (6 | ) | - | (21 | ) | ||||||||||||||
Recoveries | - | - | - | - | - | 1 | - | 1 | |||||||||||||||||
Provisions | 48 | 765 | (82 | ) | (34 | ) | (51 | ) | 8 | - | 654 | ||||||||||||||
Ending balance | $ | 1,454 | $ | 6,832 | $ | 1,138 | $ | 169 | $ | 2,628 | $ | 9 | $ | - | $ | 12,230 |
19 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
Residential Real Estate |
Commercial Real Estate |
Construction | Home Equity |
Commercial Business |
Consumer | Unallocated | Total | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||
Three Months Ended June 30, 2014 | |||||||||||||||||||||||||
Originated | |||||||||||||||||||||||||
Beginning balance | $ | 1,298 | $ | 3,767 | $ | 1,012 | $ | 192 | $ | 2,331 | $ | 3 | $ | - | $ | 8,603 | |||||||||
Charge-offs | - | - | - | - | - | (1 | ) | - | (1 | ) | |||||||||||||||
Recoveries | - | - | - | - | - | 413 | - | 413 | |||||||||||||||||
Provisions | 94 | 257 | (236 | ) | (4 | ) | (40 | ) | (409 | ) | 307 | (31 | ) | ||||||||||||
Ending balance | $ | 1,392 | $ | 4,024 | $ | 776 | $ | 188 | $ | 2,291 | $ | 6 | $ | 307 | $ | 8,984 | |||||||||
Acquired | |||||||||||||||||||||||||
Beginning balance | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||
Charge-offs | - | - | (100 | ) | - | - | - | - | (100 | ) | |||||||||||||||
Recoveries | - | - | - | - | - | - | - | - | |||||||||||||||||
Provisions | - | - | 100 | - | 1 | - | - | 101 | |||||||||||||||||
Ending balance | $ | - | $ | - | $ | - | $ | - | $ | 1 | $ | - | $ | - | $ | 1 | |||||||||
Total | |||||||||||||||||||||||||
Beginning balance | $ | 1,298 | $ | 3,767 | $ | 1,012 | $ | 192 | $ | 2,331 | $ | 3 | $ | - | $ | 8,603 | |||||||||
Charge-offs | - | - | (100 | ) | - | - | (1 | ) | - | (101 | ) | ||||||||||||||
Recoveries | - | - | - | - | - | 413 | - | 413 | |||||||||||||||||
Provisions | 94 | 257 | (136 | ) | (4 | ) | (39 | ) | (409 | ) | 307 | 70 | |||||||||||||
Ending balance | $ | 1,392 | $ | 4,024 | $ | 776 | $ | 188 | $ | 2,292 | $ | 6 | $ | 307 | $ | 8,985 |
20 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
Residential Real Estate |
Commercial Real Estate |
Construction | Home Equity |
Commercial Business |
Consumer | Unallocated | Total | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||
Six Months Ended June 30, 2015 | |||||||||||||||||||||||||
Originated | |||||||||||||||||||||||||
Beginning balance | $ | 1,431 | $ | 5,480 | $ | 1,102 | $ | 205 | $ | 2,638 | $ | 4 | $ | - | $ | 10,860 | |||||||||
Charge-offs | - | - | - | - | - | - | - | - | |||||||||||||||||
Recoveries | - | - | - | - | - | - | - | - | |||||||||||||||||
Provisions | 23 | 1,352 | 36 | (36 | ) | (20 | ) | 5 | - | 1,360 | |||||||||||||||
Ending balance | $ | 1,454 | $ | 6,832 | $ | 1,138 | $ | 169 | $ | 2,618 | $ | 9 | $ | - | $ | 12,220 | |||||||||
Acquired | |||||||||||||||||||||||||
Beginning balance | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||
Charge-offs | - | - | - | - | (15 | ) | (6 | ) | - | (21 | ) | ||||||||||||||
Recoveries | - | - | - | - | - | 4 | - | 4 | |||||||||||||||||
Provisions | - | - | - | - | 25 | 2 | - | 27 | |||||||||||||||||
Ending balance | $ | - | $ | - | $ | - | $ | - | $ | 10 | $ | - | $ | - | $ | 10 | |||||||||
Total | |||||||||||||||||||||||||
Beginning balance | $ | 1,431 | $ | 5,480 | $ | 1,102 | $ | 205 | $ | 2,638 | $ | 4 | $ | - | $ | 10,860 | |||||||||
Charge-offs | - | - | - | - | (15 | ) | (6 | ) | - | (21 | ) | ||||||||||||||
Recoveries | - | - | - | - | - | 4 | - | 4 | |||||||||||||||||
Provisions | 23 | 1,352 | 36 | (36 | ) | 5 | 7 | - | 1,387 | ||||||||||||||||
Ending balance | $ | 1,454 | $ | 6,832 | $ | 1,138 | $ | 169 | $ | 2,628 | $ | 9 | $ | - | $ | 12,230 |
21 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
Residential Real Estate |
Commercial Real Estate |
Construction | Home Equity |
Commercial Business |
Consumer | Unallocated | Total | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||
Six Months Ended June 30, 2014 | |||||||||||||||||||||||||
Originated | |||||||||||||||||||||||||
Beginning balance | $ | 1,310 | $ | 3,616 | $ | 1,032 | $ | 190 | $ | 2,225 | $ | 9 | $ | - | $ | 8,382 | |||||||||
Charge-offs | - | - | - | - | - | (1 | ) | - | (1 | ) | |||||||||||||||
Recoveries | - | - | - | - | - | 422 | - | 422 | |||||||||||||||||
Provisions | 82 | 408 | (256 | ) | (2 | ) | 66 | (424 | ) | 307 | 181 | ||||||||||||||
Ending balance | $ | 1,392 | $ | 4,024 | $ | 776 | $ | 188 | $ | 2,291 | $ | 6 | $ | 307 | $ | 8,984 | |||||||||
Acquired | |||||||||||||||||||||||||
Beginning balance | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||
Charge-offs | - | - | (100 | ) | - | - | - | - | (100 | ) | |||||||||||||||
Recoveries | - | - | - | - | - | - | - | - | |||||||||||||||||
Provisions | - | - | 100 | - | 1 | - | - | 101 | |||||||||||||||||
Ending balance | $ | - | $ | - | $ | - | $ | - | $ | 1 | $ | - | $ | - | $ | 1 | |||||||||
Total | |||||||||||||||||||||||||
Beginning balance | $ | 1,310 | $ | 3,616 | $ | 1,032 | $ | 190 | $ | 2,225 | $ | 9 | $ | - | $ | 8,382 | |||||||||
Charge-offs | - | - | (100 | ) | - | - | (1 | ) | - | (101 | ) | ||||||||||||||
Recoveries | - | - | - | - | - | 422 | - | 422 | |||||||||||||||||
Provisions | 82 | 408 | (156 | ) | (2 | ) | 67 | (424 | ) | 307 | 282 | ||||||||||||||
Ending balance | $ | 1,392 | $ | 4,024 | $ | 776 | $ | 188 | $ | 2,292 | $ | 6 | $ | 307 | $ | 8,985 |
With respect to the originated portfolio, the allocation to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments.
22 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
The following tables are a summary, by portfolio segment and impairment methodology, of the allowance for loan losses and related portfolio balances at June 30, 2015 and December 31, 2014:
Originated Loans | Acquired Loans | Total | ||||||||||||||||||||||
Portfolio | Allowance | Portfolio | Allowance | Portfolio | Allowance | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
June 30, 2015 | ||||||||||||||||||||||||
Loans individually evaluated for impairment: | ||||||||||||||||||||||||
Residential real estate | $ | 864 | $ | 2 | $ | - | $ | - | $ | 864 | $ | 2 | ||||||||||||
Commercial real estate | 4,753 | 22 | 498 | - | 5,251 | 22 | ||||||||||||||||||
Home equity | 86 | - | 240 | - | 326 | - | ||||||||||||||||||
Commercial business | 1,637 | 8 | 826 | 5 | 2,463 | 13 | ||||||||||||||||||
Consumer | - | - | 6 | - | 6 | - | ||||||||||||||||||
Subtotal | 7,340 | 32 | 1,570 | 5 | 8,910 | 37 | ||||||||||||||||||
Loans collectively evaluated for impairment: | ||||||||||||||||||||||||
Residential real estate | 171,677 | 1,452 | 3,809 | - | 175,486 | 1,452 | ||||||||||||||||||
Commercial real estate | 569,242 | 6,810 | 52,449 | - | 621,691 | 6,810 | ||||||||||||||||||
Construction | 63,431 | 1,138 | 1,120 | - | 64,551 | 1,138 | ||||||||||||||||||
Home equity | 8,440 | 169 | 8,072 | - | 16,512 | 169 | ||||||||||||||||||
Commercial business | 119,798 | 2,610 | 28,015 | 5 | 147,813 | 2,615 | ||||||||||||||||||
Consumer | 293 | 9 | 1,936 | - | 2,229 | 9 | ||||||||||||||||||
Subtotal | 932,881 | 12,188 | 95,401 | 5 | 1,028,282 | 12,193 | ||||||||||||||||||
Total | $ | 940,221 | $ | 12,220 | $ | 96,971 | $ | 10 | $ | 1,037,192 | $ | 12,230 |
23 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
Originated Loans | Acquired Loans | Total | ||||||||||||||||||||||
Portfolio | Allowance | Portfolio | Allowance | Portfolio | Allowance | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
December 31, 2014 | ||||||||||||||||||||||||
Loans individually evaluated for impairment: | ||||||||||||||||||||||||
Residential real estate | $ | 864 | $ | - | $ | - | $ | - | $ | 864 | $ | - | ||||||||||||
Commercial real estate | 4,996 | 23 | - | - | 4,996 | 23 | ||||||||||||||||||
Home equity | 91 | - | - | - | 91 | - | ||||||||||||||||||
Commercial business | 1,701 | 10 | 629 | - | 2,330 | 10 | ||||||||||||||||||
Subtotal | 7,652 | 33 | 629 | - | 8,281 | 33 | ||||||||||||||||||
Loans collectively evaluated for impairment: | ||||||||||||||||||||||||
Residential real estate | 168,969 | 1,431 | 5,198 | - | 174,167 | 1,431 | ||||||||||||||||||
Commercial real estate | 453,510 | 5,457 | 62,675 | - | 516,185 | 5,457 | ||||||||||||||||||
Construction | 62,258 | 1,102 | 971 | - | 63,229 | 1,102 | ||||||||||||||||||
Home equity | 10,135 | 205 | 7,940 | - | 18,075 | 205 | ||||||||||||||||||
Commercial business | 118,659 | 2,628 | 28,270 | - | 146,929 | 2,628 | ||||||||||||||||||
Consumer | 243 | 4 | 2,653 | - | 2,896 | 4 | ||||||||||||||||||
Subtotal | 813,774 | 10,827 | 107,707 | - | 921,481 | 10,827 | ||||||||||||||||||
Total | $ | 821,426 | $ | 10,860 | $ | 108,336 | $ | - | $ | 929,762 | $ | 10,860 |
Credit quality indicators
The Company’s policies provide for the classification of loans into the following categories: pass, special mention, substandard, doubtful and loss. Consistent with regulatory guidelines, loans that are considered to be of lesser quality are classified as substandard, doubtful, or loss assets. A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans include those loans characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans classified as loss are those considered uncollectible and of such little value that their continuance as loans is not warranted. Loans that do not expose the Company to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are designated as special mention.
Loans that are considered to be impaired are analyzed to determine whether a loss is possible and if so, a calculation is performed to determine the possible loss amount. If it is determined that the loss amount is $0, no reserve is held against the asset. If a loss is calculated, then a specific reserve for that asset is determined.
24 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
The following tables are a summary of the loan portfolio quality indicators by portfolio segment at June 30, 2015 and December 31, 2014:
Commercial Credit Quality Indicators | ||||||||||||||||||||||||
At June 30, 2015 | At December 31, 2014 | |||||||||||||||||||||||
Commercial Real Estate | Construction | Commercial Business | Commercial Real Estate | Construction | Commercial Business | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Originated loans: | ||||||||||||||||||||||||
Pass | $ | 568,712 | $ | 63,431 | $ | 117,879 | $ | 452,974 | $ | 62,258 | $ | 115,323 | ||||||||||||
Special mention | 2,063 | - | 2,952 | 2,096 | - | 5,037 | ||||||||||||||||||
Substandard | 3,220 | - | 604 | 3,436 | - | - | ||||||||||||||||||
Doubtful | - | - | - | - | - | - | ||||||||||||||||||
Loss | - | - | - | - | - | - | ||||||||||||||||||
Total originated loans | 573,995 | 63,431 | 121,435 | 458,506 | 62,258 | 120,360 | ||||||||||||||||||
Acquired loans: | ||||||||||||||||||||||||
Pass | 51,097 | 235 | 27,152 | 61,017 | 136 | 27,074 | ||||||||||||||||||
Special mention | - | - | 1,002 | - | - | 659 | ||||||||||||||||||
Substandard | 1,850 | 885 | 687 | 1,658 | 835 | 1,166 | ||||||||||||||||||
Doubtful | - | - | - | - | - | - | ||||||||||||||||||
Loss | - | - | - | - | - | - | ||||||||||||||||||
Total acquired loans | 52,947 | 1,120 | 28,841 | 62,675 | 971 | 28,899 | ||||||||||||||||||
Total | $ | 626,942 | $ | 64,551 | $ | 150,276 | $ | 521,181 | $ | 63,229 | $ | 149,259 |
25 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
Residential and Consumer Credit Quality Indicators | ||||||||||||||||||||||||
At June 30, 2015 | At December 31, 2014 | |||||||||||||||||||||||
Residential Real Estate | Home Equity | Consumer | Residential Real Estate | Home Equity | Consumer | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Originated loans: | ||||||||||||||||||||||||
Pass | $ | 171,677 | $ | 8,440 | $ | 293 | $ | 168,969 | $ | 10,135 | $ | 243 | ||||||||||||
Special mention | 864 | 86 | - | 864 | 91 | - | ||||||||||||||||||
Substandard | - | - | - | - | - | - | ||||||||||||||||||
Doubtful | - | - | - | - | - | - | ||||||||||||||||||
Loss | - | - | - | - | - | - | ||||||||||||||||||
Total originated loans | 172,541 | 8,526 | 293 | 169,833 | 10,226 | 243 | ||||||||||||||||||
Acquired loans: | ||||||||||||||||||||||||
Pass | 3,698 | 8,056 | 1,936 | 5,022 | 7,925 | 2,653 | ||||||||||||||||||
Special mention | 111 | - | - | - | - | - | ||||||||||||||||||
Substandard | - | 256 | 6 | 176 | 15 | - | ||||||||||||||||||
Doubtful | - | - | - | - | - | - | ||||||||||||||||||
Loss | - | - | - | - | - | - | ||||||||||||||||||
Total acquired loans | 3,809 | 8,312 | 1,942 | 5,198 | 7,940 | 2,653 | ||||||||||||||||||
Total | $ | 176,350 | $ | 16,838 | $ | 2,235 | $ | 175,031 | $ | 18,166 | $ | 2,896 |
Loan portfolio aging analysis
When a loan is 15 days past due, the Company sends the borrower a late notice. The Company also contacts the borrower by phone if the delinquency is not corrected promptly after the notice has been sent. When the loan is 30 days past due, the Company mails the borrower a letter reminding the borrower of the delinquency, and attempts to contact the borrower personally to determine the reason for the delinquency and ensure the borrower understands the terms of the loan. If necessary, subsequent delinquency notices are issued and the account will be monitored on a regular basis thereafter. By the 90th day of delinquency, the Company will send the borrower a final demand for payment and may recommend foreclosure. A summary report of all loans 30 days or more past due is provided to the board of directors of the Company each month. Loans greater than 90 days past due are generally put on nonaccrual status. A nonaccrual loan is restored to accrual status when it is no longer delinquent and collectability of interest and principal is no longer in doubt. A loan is considered to be no longer delinquent when timely payments are made for a period of at least six months (one year for loans providing for quarterly or semi-annual payments) by the borrower in accordance with the contractual terms.
26 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
The following tables set forth certain information with respect to our loan portfolio delinquencies by portfolio segment and amount as of June 30, 2015 and December 31, 2014:
As of June 30, 2015 | ||||||||||||||||||||||||
31-60 Days Past Due | 61-90 Days Past Due | Greater Than 90 Days | Total Past Due | Current | Carrying Amount > 90 Days and Accruing | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Originated Loans | ||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||
Residential real estate | $ | - | $ | - | $ | - | $ | - | $ | 172,541 | $ | - | ||||||||||||
Commercial real estate | - | 1,571 | 969 | 2,540 | 571,455 | - | ||||||||||||||||||
Construction | - | - | - | - | 63,431 | - | ||||||||||||||||||
Home equity | 357 | - | - | 357 | 8,169 | - | ||||||||||||||||||
Commercial business | 969 | - | 231 | 1,200 | 120,235 | - | ||||||||||||||||||
Consumer | 1 | - | - | 1 | 292 | - | ||||||||||||||||||
Total originated loans | 1,327 | 1,571 | 1,200 | 4,098 | 936,123 | - | ||||||||||||||||||
Acquired Loans | ||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||
Residential real estate | - | - | 111 | 111 | 3,698 | - | ||||||||||||||||||
Commercial real estate | 519 | - | 1,484 | 2,003 | 50,944 | 594 | ||||||||||||||||||
Construction | - | - | 885 | 885 | 235 | 885 | ||||||||||||||||||
Home equity | 79 | - | 171 | 250 | 8,062 | - | ||||||||||||||||||
Commercial business | - | 1,324 | 152 | 1,476 | 27,365 | - | ||||||||||||||||||
Consumer | 3 | - | - | 3 | 1,939 | - | ||||||||||||||||||
Total acquired loans | 601 | 1,324 | 2,803 | 4,728 | 92,243 | 1,479 | ||||||||||||||||||
Total loans | $ | 1,928 | $ | 2,895 | $ | 4,003 | $ | 8,826 | $ | 1,028,366 | $ | 1,479 |
27 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
As of December 31, 2014 | ||||||||||||||||||||||||
31-60 Days Past Due |
61-90 Days Past Due |
Greater Than 90 Days |
Total Past Due |
Current | Carrying Amount > 90 Days and Accruing |
|||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Originated Loans | ||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||
Residential real estate | $ | - | $ | - | $ | - | $ | - | $ | 169,833 | $ | - | ||||||||||||
Commercial real estate | - | - | 3,436 | 3,436 | 455,070 | 216 | ||||||||||||||||||
Construction | - | - | - | - | 62,258 | - | ||||||||||||||||||
Home equity | - | - | - | - | 10,226 | - | ||||||||||||||||||
Commercial business | - | - | - | - | 120,360 | - | ||||||||||||||||||
Consumer | - | - | - | - | 243 | - | ||||||||||||||||||
Total originated loans | - | - | 3,436 | 3,436 | 817,990 | 216 | ||||||||||||||||||
Acquired Loans | ||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||
Residential real estate | 339 | - | 294 | 633 | 4,565 | 176 | ||||||||||||||||||
Commercial real estate | 685 | 677 | 836 | 2,198 | 60,477 | 466 | ||||||||||||||||||
Construction | - | - | 835 | 835 | 136 | 835 | ||||||||||||||||||
Home equity | - | 40 | - | 40 | 7,900 | - | ||||||||||||||||||
Commercial business | 178 | 386 | 305 | 869 | 28,030 | 305 | ||||||||||||||||||
Consumer | 3 | - | - | 3 | 2,650 | - | ||||||||||||||||||
Total acquired loans | 1,205 | 1,103 | 2,270 | 4,578 | 103,758 | 1,782 | ||||||||||||||||||
Total loans | $ | 1,205 | $ | 1,103 | $ | 5,706 | $ | 8,014 | $ | 921,748 | $ | 1,998 |
Loans on nonaccrual status
The following is a summary of nonaccrual loans by portfolio segment as of June 30, 2015 and December 31, 2014:
June 30, | December 31, | |||||||
2015 | 2014 | |||||||
(In thousands) | ||||||||
Commercial real estate | 1,468 | 3,220 | ||||||
Home equity | 240 | - | ||||||
Commercial business | 386 | 142 | ||||||
Total | $ | 2,094 | $ | 3,362 |
The amount of income that was contractually due but not recognized on originated nonaccrual loans totaled $37 thousand and $44 thousand, respectively for the three months ended June 30, 2015, and 2014. The amount of income that was contractually due but not recognized on originated nonaccrual loans totaled $72 thousand and $67 thousand, respectively for the six months ended June 30, 2015, and 2014. There was no actual interest income recognized on these loans for the three months ended June 30, 2015, and 2014. There was $1 thousand and no actual interest income recognized on these loans for the six months ended June 30, 2015, and 2014.
28 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
At June 30, 2015 and December 31, 2014, there were $169 thousand and no commitments to lend additional funds to any borrower on nonaccrual status, respectively.
The preceding table excludes acquired loans that are accounted for as purchased credit impaired loans totaling $1.5 million and $1.9 million, respectively at June 30, 2015 and December 31, 2014. Such loans otherwise meet the Company’s definition of a nonperforming loan but are excluded because the loans are included in loan pools that are considered performing. The discounts arising from recording these loans at fair value were due, in part, to credit quality. The acquired loans are accounted for on either a pool or individual basis and the accretable yield is being recognized as interest income over the life of the loans based on expected cash flows.
Impaired loans
An impaired loan generally is one for which it is probable, based on current information, the Company will not collect all the amounts due under the contractual terms of the loan. Loans are individually evaluated for impairment. When the Company classifies a problem loan as impaired, it provides a specific valuation allowance for that portion of the asset that is deemed uncollectible.
29 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
The following table summarizes impaired loans by portfolio segment as of June 30, 2015 and December 31, 2014:
Carrying Amount | Unpaid Principal Balance | Associated Allowance | ||||||||||||||||||||||
June 30, 2015 | December 31, 2014 | June 30, 2015 | December 31, 2014 | June 30, 2015 | December 31, 2014 | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Originated | ||||||||||||||||||||||||
Impaired loans without a valuation allowance: | ||||||||||||||||||||||||
Residential real estate | $ | - | $ | 864 | $ | - | $ | 864 | $ | - | $ | - | ||||||||||||
Commercial real estate | 4,306 | 4,543 | 4,306 | 4,544 | - | - | ||||||||||||||||||
Home equity | 86 | 91 | 86 | 91 | - | - | ||||||||||||||||||
Commercial business | 1,126 | 1,145 | 1,140 | 1,153 | - | - | ||||||||||||||||||
Total impaired loans without a valuation allowance | 5,518 | 6,643 | 5,532 | 6,652 | - | - | ||||||||||||||||||
Impaired loans with a valuation allowance: | ||||||||||||||||||||||||
Residential real estate | 864 | - | 864 | - | 2 | - | ||||||||||||||||||
Commercial real estate | 447 | 453 | 447 | 453 | 22 | 23 | ||||||||||||||||||
Commercial business | 511 | 556 | 511 | 556 | 8 | 10 | ||||||||||||||||||
Total impaired loans with a valuation allowance | 1,822 | 1,009 | 1,822 | 1,009 | 32 | 33 | ||||||||||||||||||
Total originated impaired loans | $ | 7,340 | $ | 7,652 | $ | 7,354 | $ | 7,661 | $ | 32 | $ | 33 | ||||||||||||
Acquired | ||||||||||||||||||||||||
Impaired loans without a valuation allowance: | ||||||||||||||||||||||||
Commercial real estate | $ | 498 | $ | - | $ | 534 | $ | - | $ | - | $ | - | ||||||||||||
Commercial business | 436 | 629 | 436 | 629 | - | - | ||||||||||||||||||
Home equity | 240 | - | 240 | - | - | - | ||||||||||||||||||
Consumer | 6 | - | 6 | - | - | - | ||||||||||||||||||
Total impaired loans without a valuation allowance | 1,180 | 629 | 1,216 | 629 | - | - | ||||||||||||||||||
Impaired loans with a valuation allowance: | ||||||||||||||||||||||||
Commercial business | 390 | - | 392 | - | 5 | - | ||||||||||||||||||
Total impaired loans with a valuation allowance | 390 | - | 392 | - | 5 | - | ||||||||||||||||||
Total acquired impaired loans | $ | 1,570 | $ | 629 | $ | 1,608 | $ | 629 | $ | 5 | $ | - |
30 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
The following table summarizes the average recorded investment balance of impaired loans and interest income recognized on impaired loans by portfolio segment as of June 30, 2015 and December 31, 2014:
Average Recorded Investment | Interest Income Recognized | |||||||||||||||
June 30, 2015 | December 31, 2014 | June 30, 2015 | December 31, 2014 | |||||||||||||
Originated | (In thousands) | |||||||||||||||
Impaired loans without a valuation allowance: | ||||||||||||||||
Residential real estate | $ | — | $ | 864 | $ | — | $ | 28 | ||||||||
Commercial real estate | 4,313 | 4,034 | 35 | 223 | ||||||||||||
Home equity | 88 | 95 | 1 | 3 | ||||||||||||
Commercial business | 1,136 | 1,226 | 22 | 52 | ||||||||||||
Total impaired loans without a valuation allowance | 5,537 | 6,219 | 58 | 306 | ||||||||||||
Impaired loans with a valuation allowance: | ||||||||||||||||
Residential real estate | 864 | — | 14 | — | ||||||||||||
Commercial real estate | 449 | 457 | 14 | 29 | ||||||||||||
Commercial business | 532 | 596 | 14 | 32 | ||||||||||||
Total impaired loans with a valuation allowance | 1,845 | 1,053 | 42 | 61 | ||||||||||||
Total originated impaired loans | $ | 7,382 | $ | 7,272 | $ | 100 | $ | 367 | ||||||||
Acquired | ||||||||||||||||
Impaired loans without a valuation allowance: | ||||||||||||||||
Commercial real estate | $ | 438 | $ | — | $ | — | $ | — | ||||||||
Commercial business | 445 | 607 | 10 | 28 | ||||||||||||
Home equity | 240 | — | 2 | — | ||||||||||||
Consumer | 7 | — | — | — | ||||||||||||
Total impaired loans without a valuation allowance | 1,130 | 607 | 12 | 28 | ||||||||||||
Impaired loans with a valuation allowance: | ||||||||||||||||
Commercial business | 410 | — | 8 | — | ||||||||||||
Total impaired loans with a valuation allowance | 410 | — | 8 | — | ||||||||||||
Total acquired impaired loans | $ | 1,540 | $ | 607 | $ | 20 | $ | 28 |
Troubled debt restructurings (TDRs)
Modifications to a loan are considered to be a troubled debt restructuring when one or both of the following conditions is met: 1) the borrower is experiencing financial difficulties and/or 2) the modification constitutes a concession that is not in line with market rates and/or terms. Modified terms are dependent upon the financial position and needs of the individual borrower. Trouble debt restructurings are classified as impaired loans.
If a performing loan is restructured into a TDR it remains in performing status. If a nonperforming loan is restructured into a TDR, it continues to be carried in nonaccrual status. Nonaccrual classification may be removed if the borrower demonstrates compliance with the modified terms for a minimum of six months.
31 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
Troubled debt restructured loans are reported as such for at least one year from the date of restructuring.
In years after the restructuring, troubled debt restructured loans are removed from this classification if the restructuring agreement specifies a market rate of interest equal to that which would be provided to a borrower with similar credit at the time of restructuring and the loan is not deemed to be impaired based on the modified terms.
The recorded investment in TDRs was $7.4 million at June 30, 2015 and $3.6 million at December 31, 2014.
The following tables present loans whose terms were modified as TDRs during the periods presented:
Outstanding Recorded Investment | ||||||||||||||||||||||||
Number of Loans | Pre-Modification | Post-Modification | ||||||||||||||||||||||
(Dollars in thousands) | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | ||||||||||||||||||
Three Months Ended June 30, | ||||||||||||||||||||||||
Commercial real estate | 1 | 2 | $ | 825 | $ | 1,333 | $ | 825 | $ | 1,336 | ||||||||||||||
Commercial business | - | 3 | - | 466 | - | 466 | ||||||||||||||||||
Total | 1 | 5 | $ | 825 | $ | 1,799 | $ | 825 | $ | 1,802 | ||||||||||||||
Outstanding Recorded Investment | ||||||||||||||||||||||||
Number of Loans | Pre-Modification | Post-Modification | ||||||||||||||||||||||
(Dollars in thousands) | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | ||||||||||||||||||
Six Months Ended June 30, | ||||||||||||||||||||||||
Commercial real estate | 3 | 2 | $ | 4,045 | $ | 1,333 | $ | 4,045 | $ | 1,336 | ||||||||||||||
Commercial business | 1 | 3 | 49 | 466 | 49 | 466 | ||||||||||||||||||
Total | 4 | 5 | $ | 4,094 | $ | 1,799 | $ | 4,094 | $ | 1,802 |
All TDRs at June 30, 2015 and December 31, 2014 were performing in compliance under their modified terms.
The following table provides information on how loans were modified as a TDR during the three and six months ended June 30, 2015 and 2014.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Maturity/amortization concession | $ | 825 | $ | 631 | $ | 874 | $ | 631 | ||||||||
Payment concession | - | 1,171 | - | 1,171 | ||||||||||||
Maturity and payment concession | - | - | 3,220 | - | ||||||||||||
Total | $ | 825 | $ | 1,802 | $ | 4,094 | $ | 1,802 |
There were no loans modified in a troubled debt restructuring, for which there was a payment default during the three and six months ended June 30, 2015 and 2014, respectively.
32 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
4. Shareholders’ Equity
Common stock
On May 15, 2014, the Company priced 2,702,703 common shares in its initial public offering (“IPO”) at $18.00 per share, and on May 15, 2014, Bankwell common shares began trading on the Nasdaq Stock Market. The Company issued a total of 2,702,703 common shares in its IPO, which closed on May 20, 2014. The net proceeds from the IPO were approximately $44.7 million, after deducting the underwriting discount of approximately $2.5 million and approximately $1.3 million of expenses.
Between 2007 and 2013, four private placements for the sale of common stock were completed for the purpose of capitalizing the Company and allowing for continued growth. The private placement offerings were in addition to the initial and secondary offerings completed in 2002 and 2007, respectively. A total of 3,429,623 shares were issued and net proceeds of $47.8 million were received in connection with these offerings.
Preferred stock
In 2011, the Company elected to participate in the U.S. Treasury’s Small Business Lending Fund Program (“SBLF”). The SBLF is a $30 billion fund established under the Small Business Jobs Act of 2010 to encourage lending to small businesses by providing Tier 1 capital to qualified community banks with assets of less than $10 billion. The SBLF is intended to expand the ability to lend to small businesses, in order to help stimulate the economy and promote job growth. The transaction resulted in net capital proceeds to the Company of $5.9 million, of which at least 90% was invested in the Banks as Tier 1 Capital.
The Series C Preferred stock pays noncumulative dividends. The dividend rate on the Series C Preferred Stock for the initial ten quarterly dividend periods, commencing with the period ended September 30, 2011 and ending with the period ended December 31, 2013, was determined each quarter based on the increase in the Banks’ Qualified Small Business Lending over a baseline amount. The Company has paid dividends at a rate of 1.0% since issuance. For the eleventh quarterly dividend payment through four and one-half years after its issuance, the dividend rate on the Series C Preferred Stock will be fixed at the rate in effect at the end of the ninth quarterly dividend period, which is 1.0%. In the second quarter of 2016, four and one-half years from its issuance, the dividend rate will be fixed at 9.0% per annum.
The Series C Preferred Stock has no maturity date and ranks senior to the Company’s common stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the Company. The Series C Preferred Stock is non-voting, other than voting rights on matters that could adversely affect the Series C Preferred Stock, and is redeemable at any time by the Company, subject to the approval of its federal banking regulator. The redemption price is the aggregate liquidation preference of the SBLF Preferred Stock plus accrued but unpaid dividends and pro rata portion of any lending incentive fee. All redemptions must be in an amount at least equal to 25% of the number of originally issued shares of SBLF Preferred Stock, or 100% of the then-outstanding shares if less than 25% of the number of shares originally issued. In connection with the IPO, the U.S. Treasury exercised its piggyback registration rights under the SBLF and the Series C Preferred Stock held by the U.S. Treasury was registered under the Securities Act of 1933, as amended.
Warrants
The initial and secondary offerings completed in 2002 and 2007 each call for the issuance of Units. Each Unit issued pursuant to these two offerings represented one share of common stock and one non-transferable Warrant. The Warrants were exercisable at any time from and including October 1, 2009 and prior to or on November 30, 2009, unless extended or accelerated by the board of directors in their discretion. The board of directors has extended the exercise period to October 1, 2015 through December 1, 2015. Each Warrant allows a holder to purchase .3221 shares of common stock at an exercise price of $14.00 per share. None of the Warrants has been exercised as of June 30, 2015. Assuming that all of the Warrants issued are exercised in full during the exercise period, the Company would receive $4.3 million in gross capital and issue 304,640 shares of common stock.
33 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
As a result of the acquisition of Quinnipiac on October 1, 2014 the Company issued 68,600 warrants to former Quinnipiac warrant holders in accordance with the merger agreement. Each warrant was automatically converted into a warrant to purchase 0.56 shares of the Company’s common stock for an exercise price of $17.56. None of the warrants have been exercised as of June 30, 2015.
Dividends
The Company’s shareholders are entitled to dividends when and if declared by the board of directors, out of funds legally available. The ability of the Company to pay dividends depends, in part, on the ability of the Bank to pay dividends to the Company. In accordance with Connecticut statutes, regulatory approval is required to pay dividends in excess of the Bank’s profits retained in the current year plus retained profits from the previous two years. The bank is also prohibited from paying dividends that would reduce its capital ratios below minimum regulatory requirements. The payment of dividends is subject to additional restrictions in connection with the SBLF preferred stock.
For the six months ended June 30, 2015 and 2014, the Company paid cash dividends on preferred stock of $55 thousand. To date, the Company has not declared or paid dividends on its common stock, nor has it repurchased any of its common stock.
5. Comprehensive Income
Comprehensive income represents the sum of net income and items of other comprehensive income or loss, including net unrealized gains or losses on securities available for sale and net gains or losses on derivatives accounted for as cash flow hedges. The Company’s total comprehensive income or loss for the three and six months ended June 30, 2015 and 2014 is reported in the Consolidated Statements of Comprehensive Income.
The following table presents the changes in accumulated other comprehensive income (loss) by component, net of tax for the three and six months ended June 30, 2015 and 2014:
Net Unrealized Gain | Net Unrealized Gain | |||||||||||
(Loss) on Available | (Loss) on Interest | |||||||||||
for Sale Securities | Rate Swap | Total | ||||||||||
(In thousands) | ||||||||||||
Balance at March 31, 2015 | $ | 843 | $ | (460 | ) | $ | 383 | |||||
Other comprehensive income (loss) before reclassifications | (475 | ) | 205 | (270 | ) | |||||||
Amounts reclassified from accumulated other comprehensive income | - | - | - | |||||||||
Net other comprehensive income (loss) | (475 | ) | 205 | (270 | ) | |||||||
Balance at June 30, 2015 | $ | 368 | $ | (255 | ) | $ | 113 |
34 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
Net Unrealized Gain | Net Unrealized Gain | |||||||||||
(Loss) on Available | (Loss) on Interest | |||||||||||
for Sale Securities | Rate Swap | Total | ||||||||||
(In thousands) | ||||||||||||
Balance at March 31, 2014 | $ | 574 | $ | 53 | $ | 627 | ||||||
Other comprehensive income (loss) before reclassifications | 115 | (119 | ) | (4 | ) | |||||||
Amounts reclassified from accumulated other comprehensive income | - | - | - | |||||||||
Net other comprehensive income (loss) | 115 | (119 | ) | (4 | ) | |||||||
Balance at June 30, 2014 | $ | 689 | $ | (66 | ) | $ | 623 | |||||
Net Unrealized Gain | Net Unrealized Gain | |||||||||||
(Loss) on Available | (Loss) on Interest | |||||||||||
for Sale Securities | Rate Swap | Total | ||||||||||
(In thousands) | ||||||||||||
Balance at December 31, 2014 | $ | 644 | $ | (113 | ) | $ | 531 | |||||
Other comprehensive income (loss) before reclassifications | (276 | ) | (142 | ) | (418 | ) | ||||||
Amounts reclassified from accumulated other comprehensive income | - | - | - | |||||||||
Net other comprehensive income (loss) | (276 | ) | (142 | ) | (418 | ) | ||||||
Balance at June 30, 2015 | $ | 368 | $ | (255 | ) | $ | 113 | |||||
Net Unrealized Gain | Net Unrealized Gain | |||||||||||
(Loss) on Available | (Loss) on Interest | |||||||||||
for Sale Securities | Rate Swap | Total | ||||||||||
(In thousands) | ||||||||||||
Balance at December 31, 2013 | $ | 424 | $ | - | $ | 424 | ||||||
Other comprehensive income (loss) before reclassifications | 265 | (66 | ) | 199 | ||||||||
Amounts reclassified from accumulated other comprehensive income | - | - | - | |||||||||
Net other comprehensive income (loss) | 265 | (66 | ) | 199 | ||||||||
Balance at June 30, 2014 | $ | 689 | $ | (66 | ) | $ | 623 |
6. Earnings per Share
Basic earnings per share (“EPS”) is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock options) were exercised or converted into common stock or resulted in the issuance of common stock that then shared in earnings. Unvested share-based payment awards, which include the right to receive non-forfeitable dividends, are considered to participate with common stock in undistributed earnings for purposes of computing EPS.
The Company’s unvested restricted stock awards are participating securities, and therefore, are included in the computation of both basic and diluted earnings per common share. EPS is calculated using the two-class method, under which calculations (1) exclude from the numerator any dividends paid or owed on participating securities and any undistributed earnings considered to be attributable to participating securities and (2) exclude from the denominator the dilutive impact of the participating securities.
35 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
The following is a reconciliation of earnings available to common shareholders and basic weighted-average common shares outstanding to diluted weighted average common shares outstanding, reflecting the application of the two-class method:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
(In thousands, except per share data) | (In thousands, except per share data) | |||||||||||||||
Net income | $ | 2,286 | $ | 1,227 | $ | 4,159 | $ | 2,350 | ||||||||
Preferred stock dividends | (27 | ) | (27 | ) | (55 | ) | (55 | ) | ||||||||
Dividends and undistributed earnings allocated to participating securities | (62 | ) | (27 | ) | (108 | ) | (60 | ) | ||||||||
Net income for earnings per share calculation | $ | 2,197 | $ | 1,173 | $ | 3,996 | $ | 2,235 | ||||||||
Weighted average shares outstanding, basic | 7,042 | 5,023 | 7,035 | 4,396 | ||||||||||||
Effect of dilutive equity-based awards | 15 | 22 | 21 | 28 | ||||||||||||
Weighted average shares outstanding, diluted | 7,057 | 5,045 | 7,056 | 4,424 | ||||||||||||
Net earnings per common share: | ||||||||||||||||
Basic earnings per common share | $ | 0.31 | $ | 0.23 | $ | 0.57 | $ | 0.51 | ||||||||
Diluted earnings per common share | 0.31 | 0.23 | 0.57 | 0.51 |
7. Regulatory Matters
The Federal Reserve, the FDIC and the other federal and state bank regulatory agencies establish regulatory capital guidelines for U.S. banking organizations.
As of January 1, 2015, the Company and the Bank became subject to new capital rules set forth by the Federal Reserve, the FDIC and the other federal and state bank regulatory agencies. The new capital rules revise the banking agencies’ leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act (the Basel III Capital Rules).
The Basel III Capital Rules establish a new minimum common equity Tier 1 capital requirement of 4.5% of risk-weighted assets; set the minimum leverage ratio at 4% of total assets; increased the minimum Tier 1 capital to risk-weighted assets requirement from 4% to 6%; and retained the minimum total capital to risk-weighted assets requirement at 8.0%. A “well-capitalized” institution must generally maintain capital ratios 200 basis points higher than the minimum guidelines.
The Basel III Capital Rules also change the risk weights assigned to certain assets. The Basel III Capital Rules assigned a higher risk weight (150%) to loans that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The Basel III Capital Rules also alter the risk weighting for other assets, including marketable equity securities that are risk weighted generally at 300%. The Basel III Capital Rules require certain components of accumulated other comprehensive income (loss) to be included for purposes of calculating regulatory capital requirements unless a one-time opt-out is exercised. The Bank did exercise its opt-out option and will exclude the unrealized gain (loss) on investment securities component of accumulated other comprehensive income (loss) from regulatory capital.
36 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
The Basel III Capital Rules limit a banking organization’s capital distributions and certain discretionary bonus payments to executive officers if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The “capital conservation buffer” is being phased in from January 1, 2016 to January 1, 2019, when the full capital conservation buffer will be effective.
Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.
Management believes, as of June 30, 2015, the Bank and Company meet all capital adequacy requirements to which they are subject. There are no conditions or events since then that management believes have changed this conclusion.
The capital amounts and ratios for the Bank and the Company at June 30, 2015 were as follows:
To be Well | ||||||||||||||||||||||||
Capitalized Under | ||||||||||||||||||||||||
For Capital | Prompt Corrective | |||||||||||||||||||||||
Actual Capital | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||
(Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Bankwell Bank | ||||||||||||||||||||||||
June 30, 2015 | ||||||||||||||||||||||||
Common Equity Tier 1 Capital to Risk-Weighted Assets | $ | 124,277 | 11.44 | % | $ | 47,719 | 4.50 | % | $ | 68,928 | 6.50 | % | ||||||||||||
Total Capital to Risk-Weighted Assets | 133,506 | 12.59 | % | 84,834 | 8.00 | % | 106,043 | 10.00 | % | |||||||||||||||
Tier I Capital to Risk-Weighted Assets | 121,276 | 11.44 | % | 63,626 | 6.00 | % | 84,834 | 8.00 | % | |||||||||||||||
Tier I Capital to Average Assets | 121,276 | 10.71 | % | 45,314 | 4.00 | % | 56,643 | 5.00 | % | |||||||||||||||
Bankwell Financial Group, Inc. | ||||||||||||||||||||||||
June 30, 2015 | ||||||||||||||||||||||||
Common Equity Tier 1 Capital to Risk-Weighted Assets | $ | 119,688 | 11.22 | % | $ | 48,023 | 4.50 | % | N/A | N/A | ||||||||||||||
Total Capital to Risk-Weighted Assets | 142,898 | 13.39 | % | 85,375 | 8.00 | % | N/A | N/A | ||||||||||||||||
Tier I Capital to Risk-Weighted Assets | 130,668 | 12.24 | % | 64,031 | 6.00 | % | N/A | N/A | ||||||||||||||||
Tier I Capital to Average Assets | 130,668 | 11.26 | % | 46,406 | 4.00 | % | N/A | N/A |
As of December 31, 2014, the Bank and Company were subject to different regulatory capital requirements administered by federal and state banking agencies. Quantitative measures established by regulation to ensure capital adequacy required the Bank and Company to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets and of Tier I capital to average assets, as defined by regulation.
37 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
The capital amounts and ratios for the Bank and Company at December 31, 2014, were as follows:
To be Well | ||||||||||||||||||||||
Capitalized Under | ||||||||||||||||||||||
For Capital | Prompt Corrective | |||||||||||||||||||||
Actual Capital | Adequacy Purposes | Action Provisions | ||||||||||||||||||||
(Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||
Bankwell Bank | ||||||||||||||||||||||
December 31, 2014 | ||||||||||||||||||||||
Total Capital to Risk-Weighted Assets | $ | 125,339 | 13.55 | % | $ | 74,003 | 8.00 | % | $ 92,503 | 10.00 | % | |||||||||||
Tier I Capital to Risk-Weighted Assets | 115,359 | 12.47 | % | 37,001 | 4.00 | % | 55,502 | 6.00 | % | |||||||||||||
Tier I Capital to Average Assets | 115,359 | 11.12 | % | 41,485 | 4.00 | % | 51,856 | 5.00 | % | |||||||||||||
Bankwell Financial Group, Inc. | ||||||||||||||||||||||
December 31, 2014 | ||||||||||||||||||||||
Total Capital to Risk-Weighted Assets | $ | 135,223 | 14.59 | % | $ | 74,136 | 8.00 | % | N/A | N/A | ||||||||||||
Tier I Capital to Risk-Weighted Assets | 125,243 | 13.51 | % | 37,068 | 4.00 | % | N/A | N/A | ||||||||||||||
Tier I Capital to Average Assets | 125,243 | 11.78 | % | 42,516 | 4.00 | % | N/A | N/A |
Restrictions on dividends
The ability of the Company to pay dividends depends, in part, on the ability of the Bank to pay dividends to the Company. In accordance with Connecticut statutes, regulatory approval is required to pay dividends in excess of the Bank’s profits retained in the current year plus retained profits from the previous two years. The Bank is also prohibited from paying dividends that would reduce its capital ratios below minimum regulatory requirements.
8. | Stock-Based Compensation |
Equity award plans
The Company has five equity award plans, which are collectively referred to as the “Plan.” The current plan under which any future issuances of equity awards will be made is the 2012 BNC Financial Group, Inc. Stock Plan, or the “2012 Plan,” amended on June 26, 2013. All equity awards made under the 2012 Plan are made by means of an award agreement, which contains the specific terms and conditions of the grant. To date, all equity awards have been in the form of share options or restricted stock. At June 30, 2015, there were 467,037 shares reserved for future issuance under the 2012 Plan.
Share Options: The Company accounts for stock options based on the fair value at the date of grant over the vesting period of such awards on a straight line basis. For the six months ended June 30, 2015 and 2014, the Company recorded expense related to options granted under the various share option plans of approximately $7 thousand and $16 thousand, respectively.
There were no options granted during the six months ended June 30, 2015.
38 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
A summary of the status of outstanding share options as of and for the six months ended June 30, 2015 is presented below:
Six Months Ended | ||||||||
June 30, 2015 | ||||||||
Weighted | ||||||||
Number | Average | |||||||
of | Exercise | |||||||
Shares | Price | |||||||
Options outstanding at beginning of period | 204,793 | $ | 17.42 | |||||
Exercised | (17,770 | ) | 14.50 | |||||
Forfeited | (300 | ) | 15.00 | |||||
Expired | (1,225 | ) | 14.50 | |||||
Options outstanding at end of period | 185,498 | 17.73 | ||||||
Options exercisable at end of period | 180,998 | 17.79 | ||||||
Weighted-average fair value of options | ||||||||
granted during the period | N/A |
Intrinsic value is the amount by which the fair value of the underlying stock exceeds the exercise price of an option on the exercise date. The total intrinsic value of share options exercised during the six months ended June 30, 2015 was $89 thousand.
Restricted Stock: Restricted stock provides grantees with rights to shares of common stock upon completion of a service period and certain performance goals. Shares of unvested restricted stock are considered participating securities. Restricted stock awards generally vest over one to five years.
The following table presents the activity for restricted stock for the six months ended June 30, 2015:
Six Months Ended June 30, 2015 | ||||||||||
Weighted | ||||||||||
Number | Average | |||||||||
of | Grant Date | |||||||||
Shares | Fair Value | |||||||||
Unvested at beginning of period | 165,862 | $ | 18.08 | |||||||
Granted | 40,000 | 18.94 | ||||||||
Vested | (4,900 | ) | 14.80 | |||||||
Forfeited | (2,548 | ) | 17.75 | |||||||
Unvested at end of period | 198,414 | 18.34 |
The Company’s restricted stock expense for the six months ended June 30, 2015 and 2014 was $515 thousand and $264 thousand, respectively.
39 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
Market Conditions Restricted Stock: On December 9, 2014 the Company issued restricted stock with market and service conditions pursuant to the Company’s 2012 Stock Plan. The maximum number of shares that can vest is 49,400. The actual number of shares to be vested will be based on market criteria over a five-year period ending on December 1, 2019 based on the Company’s stock price being at or above $25.00, $27.00 and $29.00 per share over a 60-day consecutive period. These shares may vest over a period from December 1, 2017 to December 1, 2019 based on meeting the price targets. In addition, the grantees must be employed with the Company on the vesting date to receive the shares. The Company determined the fair value of these market condition awards in accordance with ASC 718 – Stock Compensation using the Monte Carlo simulation model deemed appropriate for this type of grant. The grant date fair value for these grants was $11.63 for the awards that vest at the $25 stock price, $10.30 for the awards that vest at the $27 stock price and $9.10 for the awards that vest at the $29 stock price. The grant date fair value for the Company’s stock was $18.99 per share. The Company recognized $85 thousand in stock compensation expense for the six months ended June 30, 2015 for these restricted stock awards.
9. | Derivative Instruments |
Information about derivative instruments at June 30, 2015 and December 31, 2014 is as follows:
June 30, 2015:
(Dollars in thousands) | Notional Amount |
Maturity | Received | Paid | Fair
Value Asset (Liability) |
||||||||||||
Cash flow hedge: | |||||||||||||||||
Interest rate swap on FHLB advance | $ | 25,000 | 4.7 years | 0.28 | % | 1.62 | % | $ | (291 | ) | |||||||
Interest rate swap on FHLB advance | $ | 25,000 | 5.0 years | 0.28 | % | 1.83 | % | (310 | ) | ||||||||
$ | (601 | ) |
December 31, 2014:
(Dollars in thousands) | Notional Amount |
Maturity | Received | Paid | Fair
Value Asset (Liability) |
||||||||||||
Cash flow hedge: | |||||||||||||||||
Interest rate swap on FHLB advance | $ | 25,000 | 4.7 years | 0.26 | % | 1.62 | % | $ | (73 | ) | |||||||
Interest rate swap on forward-starting FHLB advance | $ | 25,000 | 5.0 years | 0.26 | % | 1.83 | % | (113 | ) | ||||||||
$ | (186 | ) |
The effective portion of unrealized changes in the fair value of derivatives accounted for as cash flow hedges is reported in other comprehensive income and subsequently reclassified to earnings in the same period or periods during which the hedged forecasted transaction affects earnings. The Bank assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction. The ineffective portion of changes in the fair value of the derivatives is recognized directly in earnings.
40 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
The Bank’s cash flow hedge positions are all forward starting interest rate swap transactions. The Bank entered into the following forward starting interest rate swap transactions:
Effective Date of | ||||||||
Notional | Hedged | Duration of | ||||||
(Dollars in thousands) | Amount | Borrowing | Borrowing | Counterparty | ||||
Type of borrowing: | ||||||||
FHLB 90-day advance | $25,000 | April 1, 2014 | 4.7 years | Bank of Montreal | ||||
FHLB 90-day advance | $25,000 | January 2, 2015 | 5.0 years | Bank of Montreal |
This hedge strategy converts the LIBOR based rate of interest on certain FHLB advances to fixed interest rates, thereby protecting the Bank from floating interest rate variability.
Changes in the consolidated statements of comprehensive income related to interest rate derivatives designated as hedges of cash flows were as follows for the three and six months ended June 30, 2015 and 2014:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(In thousands) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Interest rate swap on FHLB advance: | ||||||||||||||||
Unrealized gain (loss) recognized in accumulated other | ||||||||||||||||
comprehensive income | $ | 336 | $ | (195 | ) | $ | (232 | ) | $ | (108 | ) | |||||
Income tax (expense) benefit on items recognized in | ||||||||||||||||
accumulated other comprehensive income | (131 | ) | 76 | 90 | 42 | |||||||||||
Other comprehensive income (loss) | $ | 205 | $ | (119 | ) | $ | (142 | ) | $ | (66 | ) | |||||
Interest expense recognized on hedged FHLB advance | $ | 183 | $ | 88 | $ | 365 | $ | 88 | ||||||||
10. Fair Value of Financial Instruments
GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the statement of condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparisons to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at either June 30, 2015 or December 31, 2014. The estimated fair value amounts have been measured as of the respective period-ends, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end.
41 |
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
The carrying values, fair values and placement in the fair value hierarchy of the Company’s financial instruments at June 30, 2015 and December 31, 2014 were as follows:
June 30, 2015 | ||||||||||||||||||||
Carrying | Fair | |||||||||||||||||||
Value | Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Financial Assets: | ||||||||||||||||||||
Cash and due from banks | $ | 75,550 | $ | 75,550 | $ | 75,550 | $ | - | $ | - | ||||||||||
Available for sale securities | 46,883 | 46,883 | - | 46,883 | - | |||||||||||||||
Held to maturity securities | 11,341 | 11,337 | - | 11,337 | - | |||||||||||||||
Loans held for sale | - | - | - | - | - | |||||||||||||||
Loans receivable, net | 1,021,693 | 1,026,890 | - | - | 1,026,890 | |||||||||||||||
Accrued interest receivable | 3,575 | 3,575 | - | - | 3,575 | |||||||||||||||
FHLB stock | 6,918 | 6,918 | - | - | 6,918 | |||||||||||||||
Financial Liabilities: | ||||||||||||||||||||
Demand deposits | $ | 162,546 | $ | 162,546 | $ | - | $ | - | $ | 162,546 | ||||||||||
NOW and money market | 334,561 | 334,561 | - | - | 334,561 | |||||||||||||||
Savings | 106,445 |