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 I – FINANCIAL INFORMATION  
 
  Item 1. Financial Statements 3
    Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014 3
    Consolidated Statements of Income for the three and six months ended June 30, 2015 and 2014 4
    Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2015 and 2014 5
    Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2015 and 2014 6
    Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014 7
    Notes to Consolidated Financial Statements 9
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 50
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 66
  Item 4. Controls and Procedures 66
       
PART II – OTHER INFORMATION  
  Item 1. Legal Proceedings 66
  Item 1A. Risk Factors 66
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 66
  Item 3. Defaults Upon Senior Securities 66
  Item 4. Mine Safety Disclosures 67
  Item 5. Other Information 67
  Item 6. Exhibits 67
       
  Signatures 68
       
  Certifications 69

 

 
 

 

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