UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

 

¨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. þ 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). þ 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 þ
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 þ No 

 

As of October 31, 2015, there were 7,301,785 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 September 30, 2015 and December 31, 2014 3
Consolidated Statements of Income for the three and nine months ended September 30, 2015 and 2014 4
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2014 5
Consolidated Statements of Shareholders’ Equity for the nine months ended September 30, 2015 and 2014 6
Consolidated Statements of Cash Flows for the nine months ended September 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 53
Item 3. Quantitative and Qualitative Disclosures About Market Risk 68
Item 4. Controls and Procedures 68
   
PART II – OTHER INFORMATION  
Item 1. Legal Proceedings 69
Item 1A. Risk Factors 69
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 69
Item 3. Defaults Upon Senior Securities 69
Item 4. Mine Safety Disclosures 69
Item 5. Other Information 69
Item 6. Exhibits 69
   
Signatures 70
   
Certifications 71

 

 2 
 

  

PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements

Bankwell Financial Group, Inc.

Consolidated Balance Sheets - (unaudited)

(Dollars in thousands, except share data)

 

   September 30,   December 31, 
   2015   2014 
         
ASSETS          
Cash and due from banks  $86,830   $48,559 
Held to maturity investment securities, at amortized cost   11,282    11,454 
Available for sale investment securities, at fair value   45,023    65,009 
Loans held for sale   252    586 
Loans receivable (net of allowance for loan losses of $13,720 at September 30, 2015 and $10,860 at December 31, 2014)   1,108,439    915,981 
Foreclosed real estate   1,328    950 
Accrued interest receivable   3,831    3,323 
Federal Home Loan Bank stock, at cost   6,918    6,109 
Premises and equipment, net   11,505    11,910 
Bank-owned life insurance   23,578    23,028 
Goodwill   2,589    2,589 
Other intangible assets   694    848 
Deferred income taxes, net   8,604    7,156 
Other assets   2,472    2,029 
Total assets  $1,313,345   $1,099,531 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Liabilities          
Deposits          
Noninterest bearing deposits  $148,732   $166,030 
Interest bearing deposits   876,957    669,409 
Total deposits   1,025,689    835,439 
           
Advances from the Federal Home Loan Bank   120,000    129,000 
Subordinated debentures   25,037    - 
Accrued expenses and other liabilities   6,831    5,882 
Total liabilities   1,177,557    970,321 
           
Commitments and Contingencies   -    - 
           
Shareholders' equity          
Preferred stock, senior noncumulative perpetual, Series C, no par; 10,980 shares issued at September 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, 7,252,429 and 7,185,482 shares issued at September 30, 2015 and December 31, 2014, respectively   108,319    107,265 
Retained earnings   16,764    10,434 
Accumulated other comprehensive (loss) income   (275)   531 
Total shareholders' equity   135,788    129,210 
           
Total liabilities and shareholders' equity  $1,313,345   $1,099,531 

 

See accompanying notes to consolidated financial statements (unaudited)

 

 3 
 

  

Bankwell Financial Group, Inc.

Consolidated Statements of Income – (unaudited)

(Dollars in thousands, except per share amounts

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2015   2014   2015   2014 
                 
Interest and dividend income                    
Interest and fees on loans  $12,662   $8,054   $35,315   $23,040 
Interest and dividends on securities   491    569    1,469    1,417 
Interest on cash and cash equivalents   33    45    62    116 
Total interest income   13,186    8,668    36,846    24,573 
                     
Interest expense                    
Interest expense on deposits   1,637    905    3,905    2,257 
Interest on borrowings   632    168    1,389    427 
Total interest expense   2,269    1,073    5,294    2,684 
                     
Net interest income   10,917    7,595    31,552    21,889 
                     
Provision for loan losses   1,489    566    2,876    847 
                     
Net interest income after provision for loan losses   9,428    7,029    28,676    21,042 
                     
Noninterest income                    
Gains and fees from sales of loans   447    366    885    1,008 
Service charges and fees   234    153    675    420 
Bank owned life insurance   182    135    549    305 
Other   348    103    535    475 
Total noninterest income   1,211    757    2,644    2,208 
                     
Noninterest expense                    
Salaries and employee benefits   3,798    2,786    11,817    9,412 
Occupancy and equipment   1,370    1,066    4,029    3,162 
Data processing   416    314    1,157    949 
Professional services   339    394    1,033    1,035 
Marketing   288    135    707    463 
FDIC insurance   166    120    487    345 
Director fees   136    177    424    460 
Foreclosed real estate   81    9    73    21 
Amortization of intangibles   51    27    153    80 
Merger and acquisition related expenses   -    145    -    408 
Other   513    357    1,610    1,134 
Total noninterest expense   7,158    5,530    21,490    17,469 
Income before income tax expense   3,481    2,256    9,830    5,781 
Income tax expense   1,228    765    3,418    1,940 
Net income  $2,253   $1,491   $6,412   $3,841 
Net income attributable to common shareholders  $2,226   $1,464   $6,330   $3,759 
                     
Earnings Per Common Share:                    
Basic  $0.31   $0.22   $0.88   $0.72 
Diluted  $0.31    0.22   $0.87    0.72 
                     
Weighted Average Common Shares Outstanding:                    
Basic   7,044,586    6,483,210    7,038,517    5,099,325 
Diluted   7,059,117    6,501,984    7,057,450    5,124,261 

 

See accompanying notes to consolidated financial statements (unaudited)

 

 4 
 

 

Bankwell Financial Group, Inc.

Consolidated Statements of Comprehensive Income – (unaudited)

(In thousands)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2015   2014   2015   2014 
                 
Net income  $2,253   $1,491   $6,412   $3,841 
Other comprehensive income (loss):                    
Unrealized gains (losses) on securities:                    
Unrealized holding gains (losses) on available for sale securities   190    (253)   (262)   180 
Reclassification adjustment for (gain) loss realized in net income   -    -    -    - 
Net change in unrealized gain (loss)   190    (253)   (262)   180 
Income tax (expense) benefit   (74)   99    102    (70)
Unrealized gains (losses) on securities, net of tax   116    (154)   (160)   110 
Unrealized (losses) gains on interest rate swaps:                    
Unrealized (losses) gains on interest rate swaps designated as cash flow hedge   (826)   218    (1,058)   111 
Income tax benefit (expense)   322    (85)   412    (43)
Unrealized (losses) gains on interest rate swap, net of tax   (504)   133    (646)   68 
Total other comprehensive (loss) income   (388)   (21)   (806)   178 
Comprehensive income  $1,865   $1,470   $5,606   $4,019 

 

See accompanying notes to consolidated financial statements (unaudited)

 

 5 
 

  

Bankwell Financial Group, Inc.

Consolidated Statements of Shareholders' Equity – (unaudited)

(In thousands, except share data)

 

                   Accumulated     
   Number of               Other     
   Outstanding   Preferred   Common   Retained   Comprehensive     
   Shares   Stock   Stock   Earnings   Income (Loss)   Total 
Balance at December 31, 2014   7,185,482   $10,980   $107,265   $10,434   $531   $129,210 
Net income   -    -    -    6,412    -    6,412 
Other comprehensive loss, net of tax   -    -    -    -    (806)   (806)
Preferred stock cash dividends   -    -    -    (82)   -    (82)
Stock-based compensation expense   -    -    796    -    -    796 
Forfeitures of restricted stock   (2,623)   -    -    -    -    - 
Issuance of restricted stock   51,800    -    -    -    -    - 
Stock options exercised   17,770    -    258    -    -    258 
Balance at September 30, 2015   7,252,429   $10,980   $108,319   $16,764   $(275)  $135,788 

 

                   Accumulated     
   Number of               Other     
   Outstanding   Preferred   Common   Retained   Comprehensive     
   Shares   Stock   Stock   Earnings   Income (Loss)   Total 
Balance at December 31, 2013   3,876,393   $10,980   $52,105   $5,976   $424   $69,485 
Net income   -    -    -    3,841    -    3,841 
Other comprehensive income, net of tax   -    -    -    -    178    178 
Preferred stock cash dividends   -    -    -    (82)   -    (82)
Stock-based compensation expense   -    -    164    -    -    164 
Forfeitures of restricted stock   (49,916)   -    -    -    -    - 
Issuance of restricted stock   10,510    -    -    -    -    - 
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 September 30, 2014   6,559,995   $10,980   $97,180   $9,735   $602   $118,497 

 

See accompanying notes to consolidated financial statements (unaudited)

 

 6 
 

  

Bankwell Financial Group, Inc.

Consolidated Statements of Cash Flows – (unaudited)

(In thousands)

 

   Nine Months Ended 
   September 30, 
   2015   2014 
Cash flows from operating activities          
Net income  $6,412   $3,841 
Adjustments to reconcile net income to net cash provided by operating activities:          
Net amortization of premiums and discounts on investment securities   89    82 
Provision for loan losses   2,876    847 
Provision for deferred taxes   (1,074)   (213)
Depreciation and amortization   1,256    835 
Increase in cash surrender value of bank-owned life insurance   (549)   (305)
Loan principal sold   (13,082)   (22,465)
Proceeds from sales of loans   14,301    23,572 
Net gain on sales of loans   (885)   (1,008)
Equity-based compensation   796    164 
Net accretion of purchase accounting adjustments   (104)   (352)
Loss on sale and write-downs of foreclosed real estate   104    - 
Net change in:          
Deferred loan fees   612    583 
Accrued interest receivable   (508)   (311)
Other assets   (1,054)   (3,524)
Accrued expenses and other liabilities   949    167 
Net cash provided by operating activities   10,139    1,913 
           
Cash flows from investing activities          
Proceeds from principal repayments on available for sale securities   1,612    3,307 
Proceeds from principal repayments on held to maturity securities   165    2,308 
Net proceeds from sales and calls of available for sale securities   18,030    1,620 
Purchases of available for sale securities   -    (43,763)
Purchase of bank-owned life insurance   -    (12,500)
Net increase in loans   (196,984)   (109,323)
Purchases of premises and equipment   (851)   (1,562)
Purchase of Federal Home Loan Bank stock   (809)   - 
Proceeds from sale of foreclosed real estate   400    - 
Net cash used by investing activities   (178,437)   (159,913)

 

See accompanying notes to consolidated financial statements (unaudited)

 

 7 
 

  

Consolidated Statements of Cash Flows- (Continued)

(In thousands)

 

   Nine Months Ended 
   September 30, 
   2015   2014 
Cash flows from financing activities          
Net change in time certificates of deposit  $119,805   $38,569 
Net change in other deposits   70,551    (4,845)
Increase in subordinated debt   25,037    - 
Net change in FHLB advances   (9,000)   33,000 
Proceeds from issuance of common stock   -    44,704 
Proceeds from exercise of options   258    207 
Dividends paid on preferred stock   (82)   (82)
Net cash provided by financing activities   206,569    111,553 
Net increase (decrease) in cash and cash equivalents   38,271    (46,447)
Cash and cash equivalents:          
Beginning of year   48,559    82,013 
End of period  $86,830   $35,566 
Supplemental disclosures of cash flows information:          
Cash paid for:          
Interest  $4,825   $2,742 
Income taxes   5,076    450 
Noncash investing and financing activities          
Loans transferred to foreclosed real estate  $883   $- 

 

See accompanying notes to consolidated financial statements (unaudited)

 

 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 and New Haven Counties 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 as of 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 as of 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.

 

 10 
 

  

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

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. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. Accordingly, 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.

 

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 December 15, 2015. 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 as of 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.

 

 11 
 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

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 for the Company 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.

 

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, with early adoption permitted. The Company elected to early adopt the provisions of ASU 2015-03 upon issuance of its subordinated debentures on August 19, 2015 and record $0.5 million of debt issuance costs incurred as a direct deduction from the debt liability.

 

 12 
 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

ASU No. 2015-16, Business Combinations (Topic 805) – “Simplifying the Accounting for Measurement-Period Adjustments.” This ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, including the cumulative effect of the change in provisional amount as if the accounting had been completed at the acquisition date. The adjustments related to previous reporting periods since the acquisition date must be disclosed by income statement line item either on the face of the income statement or in the notes. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. The Company does not expect the application of this guidance to have a material impact on the Company's financial statements.

 

 13 
 

  

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 September 30, 2015 were as follows:

 

`  September 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   $2   $-   $501 
Due from one through five years   5,199    4    (4)   5,199 
Due from five through ten years   1,729    18    (11)   1,736 
Due after ten years   798    1    (13)   786 
    8,225    25    (28)   8,222 
                     
State agency and municipal obligations                    
Due from one through five years   521    42    -    563 
Due from five through ten years   9,501    321    (330)   9,492 
Due after ten years   7,046    381    (21)   7,406 
    17,068    744    (351)   17,461 
                     
Corporate bonds                    
Due in less than one year   2,999    1    -    3,000 
Due from one through five years   8,210    256    -    8,466 
Due from five through ten years   3,069    33    -    3,102 
    14,278    290    -    14,568 
                     
Government-sponsored mortgage backed securities                    
Due from one through five years   77    -    -    77 
Due after ten years   4,581    120    (6)   4,695 
    4,658    120    (6)   4,772 
                     
Total available for sale securities  $44,229   $1,179   $(385)  $45,023 
                     
Held to maturity securities:                    
U.S. Government and agency obligations                    
Due in less than one year  $1,002   $-   $-   $1,002 
State agency and municipal obligations                    
Due after ten years   9,064    -    -    9,064 
Corporate bonds                    
Due from five through ten years   1,000    -    (5)   995 
Government-sponsored mortgage backed securities                    
Due after ten years   216    24    -    240 
Total held to maturity securities  $11,282   $24   $(5)  $11,301 

 

 14 
 

  

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 

 

 15 
 

 

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 nine months ended September 30, 2015 and 2014.

 

At September 30, 2015 and December 31, 2014, securities with approximate fair values of $6.0 million and $5.9 million were pledged as collateral for public deposits, respectively.

 

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 September 30, 2015 and December 31, 2014:

 

   Length of Time in Continuous Unrealized Loss Position         
   Less Than 12 Months   12 Months or More   Total
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Loss   Value   Loss   Value   Loss 
           (In thousands)         
September 30, 2015                        
U.S. Government and agency obligations  $1,296   $(3)  $2,374   $(25)  $3,670   $(28)
State agency and municipal obligations   1,439    (350)   -    -    1,439    (350)
Corporate bonds   -    -    995    (5)   995    (5)
Government-sponsored mortgage backed securities   458    (4)   246    (3)   704    (7)
Total investment securities  $3,193   $(357)  $3,615   $(33)  $6,808   $(390)
                               
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 22 and 42 investment securities as of September 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 because payments are backed by a senior lien position on cash receipts from sales tax revenue with a strong debt service coverage of over 5.0x. As such, there is no concern in terms of whether there will be enough sales tax revenue in the future to continue to receive all principal and interest payments.

 

 16 
 

 

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 September 30, 2015 and December 31, 2014:

 

   September 30, 2015   December 31, 2014 
(In thousands)  Originated   Acquired   Total   Originated   Acquired   Total 
                         
Real estate loans:                              
Residential  $168,830   $2,932   $171,762   $169,833   $5,198   $175,031 
Commercial   632,410    51,673    684,083    458,506    62,675    521,181 
Construction   83,986    1,007    84,993    62,258    971    63,229 
Home equity   8,915    7,365    16,280    10,226    7,940    18,166 
    894,141    62,977    957,118    700,823    76,784    777,607 
                               
Commercial business   138,621    28,021    166,642    120,360    28,899    149,259 
                               
Consumer   30    1,909    1,939    243    2,653    2,896 
Total loans   1,032,792    92,907    1,125,699    821,426    108,336    929,762 
                               
Allowance for loan losses   (13,675)   (45)   (13,720)   (10,860)   -    (10,860)
Deferred loan origination fees, net   (3,549)   -    (3,549)   (2,937)   -    (2,937)
Unamortized loan premiums   9    -    9    16    -    16 
Loans receivable, net  $1,015,577   $92,862   $1,108,439   $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 typically 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.

 

 17 
 

 

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 September 30, 
   2015   2014 
Balance at beginning of period  $1,134   $817 
Acquisition   -    - 
Accretion   (21)   (81)
Other (a)   (145)   - 
Balance at end of period  $968   $736 

 

a)Represents changes in cash flows expected to be collected due to loan sales or payoffs.

 

(In thousands)  Nine Months Ended September 30, 
   2015   2014 
Balance at beginning of period  $1,382   $1,418 
Acquisition   -    - 
Accretion   (137)   (338)
Other (a)   (277)   (344)
Balance at end of period  $968   $736 

 

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. 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.

 

 18 
 

  

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 combined maximum of 80% of the appraised value of the property and the Company requires a first or second lien position on the property. These loans can be affected by economic conditions and the values of the underlying properties.

 

Commercial 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.

 

 19 
 

 

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 nine months ended September 30, 2015 and 2014, by portfolio segment:

 

   Residential   Commercial       Home   Commercial             
   Real Estate   Real Estate   Construction   Equity   Business   Consumer   Unallocated   Total 
               (In thousands)             
Three Months Ended September 30, 2015                               
Originated                                        
Beginning balance  $1,454   $6,832   $1,138   $169   $2,618   $9   $-   $12,220 
Charge-offs   -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    1    -    1 
Provisions   (40)   722    399    11    369    (7)   -    1,454 
Ending balance  $1,414   $7,554   $1,537   $180   $2,987   $3   $-   $13,675 
                                         
Acquired                                        
Beginning balance  $-   $-   $-   $-   $10   $-   $-   $10 
Charge-offs   -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    - 
Provisions   -    10    -    -    20    5    -    35 
Ending balance  $-   $10   $-   $-   $30   $5   $-   $35 
                                         
Total                                        
Beginning balance  $1,454   $6,832   $1,138   $169   $2,628   $9   $-   $12,230 
Charge-offs   -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    1    -    1 
Provisions   (40)   732    399    11    389    (2)   -    1,489 
Ending balance  $1,414   $7,564   $1,537   $180   $3,017   $8   $-   $13,720 

 

 20 
 

  

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

   Residential   Commercial       Home   Commercial             
   Real Estate   Real Estate   Construction   Equity   Business   Consumer   Unallocated   Total 
               (In thousands)             
Three Months Ended September 30, 2014                       
Originated                                        
Beginning balance  $1,392   $4,024   $776   $188   $2,291   $6   $307   $8,984 
Charge-offs   -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    1    -    1 
Provisions   19    637    115    3    100    -    (307)   567 
Ending balance  $1,411   $4,661   $891   $191   $2,391   $7   $-   $9,552 
                                         
Acquired                                        
Beginning balance  $-   $-   $-   $-   $1   $-   $-   $1 
Charge-offs   -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    - 
Provisions   -    -    -    -    (1)   -    -    (1)
Ending balance  $-   $-   $-   $-   $-   $-   $-   $- 
                                         
Total                                        
Beginning balance  $1,392   $4,024   $776   $188   $2,292   $6   $307   $8,985 
Charge-offs   -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    1    -    1 
Provisions   19    637    115    3    99    -    (307)   566 
Ending balance  $1,411   $4,661   $891   $191   $2,391   $7   $-   $9,552 

 

 21 
 

  

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

   Residential   Commercial       Home   Commercial             
   Real Estate   Real Estate   Construction   Equity   Business   Consumer   Unallocated   Total 
               (In thousands)             
Nine Months Ended September 30, 2015                        
Originated                                        
Beginning balance  $1,431   $5,480   $1,102   $205   $2,638   $4   $-   $10,860 
Charge-offs   -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    1    -    1 
Provisions   (17)   2,074    435    (25)   349    (2)   -    2,814 
Ending balance  $1,414   $7,554   $1,537   $180   $2,987   $3   $-   $13,675 
                                         
Acquired                                        
Beginning balance  $-   $-   $-   $-   $-   $-   $-   $- 
Charge-offs   -    -    -    -    (15)   (6)   -    (21)
Recoveries   -    -    -    -    -    4    -    4 
Provisions   -    10    -    -    45    7    -    62 
Ending balance  $-   $10   $-   $-   $30   $5   $-   $45 
                                         
Total                                        
Beginning balance  $1,431   $5,480   $1,102   $205   $2,638   $4   $-   $10,860 
Charge-offs   -    -    -    -    (15)   (6)   -    (21)
Recoveries   -    -    -    -    -    5    -    5 
Provisions   (17)   2,084    435    (25)   394    5    -    2,876 
Ending balance  $1,414   $7,564   $1,537   $180   $3,017   $8   $-   $13,720 

 

 22 
 

  

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

   Residential   Commercial       Home   Commercial             
   Real Estate   Real Estate   Construction   Equity   Business   Consumer   Unallocated   Total 
               (In thousands)             
Nine Months Ended September 30, 2014                               
Originated                                        
Beginning balance  $1,310   $3,616   $1,032   $190   $2,225   $9   $-   $8,382 
Charge-offs   -    -    -    -    -    (1)   -    (1)
Recoveries   -    -    -    -    -    424    -    424 
Provisions   101    1,045    (141)   1    166    (425)   -    747 
Ending balance  $1,411   $4,661   $891   $191   $2,391   $7   $-   $9,552 
                                         
Acquired                                        
Beginning balance  $-   $-   $-   $-   $-   $-   $-   $- 
Charge-offs   -    -    (100)   -    -    -    -    (100)
Recoveries   -    -    -    -    -    -    -    - 
Provisions   -    -    100    -    -    -    -    100 
Ending balance  $-   $-   $-   $-   $-   $-   $-   $- 
                                         
Total                                        
Beginning balance  $1,310   $3,616   $1,032   $190   $2,225   $9   $-   $8,382 
Charge-offs   -    -    (100)   -    -    (1)   -    (101)
Recoveries   -    -    -    -    -    424    -    424 
Provisions   101    1,045    (41)   1    166    (425)   -    847 
Ending balance  $1,411   $4,661   $891   $191   $2,391   $7   $-   $9,552 

 

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.

 

 23 
 

 

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 September 30, 2015 and December 31, 2014:

 

   Originated Loans   Acquired Loans   Total 
   Portfolio   Allowance   Portfolio   Allowance   Portfolio   Allowance 
           (In thousands)         
September 30, 2015                        
Loans individually evaluated for impairment:                              
Residential real estate  $864   $2   $-   $-   $864   $2 
Commercial real estate   4,743    22    633    10    5,376    32 
Home equity   426    7    198    -    624    7 
Commercial business   1,603    8    1,108    24    2,711    32 
Consumer   -    -    5    5    5    5 
Subtotal   7,636    39    1,944    39    9,580    78 
Loans collectively evaluated for impairment:                              
Residential real estate   167,966    1,412    2,932    -    170,898    1,412 
Commercial real estate   627,667    7,532    51,040    -    678,707    7,532 
Construction   83,986    1,537    1,007    -    84,993    1,537 
Home equity   8,489    173    7,167    -    15,656    173 
Commercial business   137,018    2,979    26,913    6    163,931    2,985 
Consumer   30    3    1,904    -    1,934    3 
Subtotal   1,025,156    13,636    90,963    6    1,116,119    13,642 
                               
Total  $1,032,792   $13,675   $92,907   $45   $1,125,699   $13,720 

 

 24 
 

  

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.

 

 25 
 

  

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 September 30, 2015 and December 31, 2014:

 

   Commercial Credit Quality Indicators 
   At September 30, 2015   At December 31, 2014 
   Commercial       Commercial   Commercial       Commercial 
   Real Estate   Construction   Business   Real Estate   Construction   Business 
           (In thousands)         
Originated loans:                              
Pass  $627,140   $83,986   $137,018   $452,974   $62,258   $115,323 
Special mention   2,050    -    1,026    2,096    -    5,037 
Substandard   3,220    -    577    3,436    -    - 
Doubtful   -    -    -    -    -    - 
Loss   -    -    -    -    -    - 
Total originated loans   632,410    83,986    138,621    458,506    62,258    120,360 
Acquired loans:                              
Pass   49,903    233    26,744    61,017    136    27,074 
Special mention   -    -    550    -    -    659 
Substandard   1,770    774    727    1,658    835    1,166 
Doubtful   -    -    -    -    -    - 
Loss   -    -    -    -    -    - 
Total acquired loans   51,673    1,007    28,021    62,675    971    28,899 
Total  $684,083   $84,993   $166,642   $521,181   $63,229   $149,259 

 

 26 
 

  

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

   Residential and Consumer Credit Quality Indicators 
   At September 30, 2015   At December 31, 2014 
   Residential   Home       Residential   Home     
   Real Estate   Equity   Consumer   Real Estate   Equity   Consumer 
           (In thousands)         
Originated loans:                        
Pass  $167,966   $8,489   $30   $168,969   $10,135   $243 
Special mention   864    83    -    864    91    - 
Substandard   -    343    -    -    -    - 
Doubtful   -    -    -    -    -    - 
Loss   -    -    -    -    -    - 
Total originated loans   168,830    8,915    30    169,833    10,226    243 
Acquired loans:                              
Pass   2,823    6,983    1,823    5,022    7,925    2,653 
Special mention   109    -    -    -    -    - 
Substandard   -    382    86    176    15    - 
Doubtful   -    -    -    -    -    - 
Loss   -    -    -    -    -    - 
Total acquired loans   2,932    7,365    1,909    5,198    7,940    2,653 
Total  $171,762   $16,280   $1,939   $175,031   $18,166   $2,896 

 

 27 
 

  

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

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.

 

 28 
 

  

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 September 30, 2015 and December 31, 2014:

 

   As of September 30, 2015 
                       Carrying 
                       Amount > 
           Greater           90 Days 
   31-60 Days   61-90 Days   Than 90   Total Past       and 
   Past Due   Past Due   Days   Due   Current   Accruing 
           (In thousands)         
Originated Loans                              
Real estate loans:                              
Residential real estate  $833   $969   $-   $1,802   $167,028   $- 
Commercial real estate   313    1,565    970    2,848    629,562    - 
Construction   1,750    -    -    1,750    82,236    - 
Home equity   -    -    198    198    8,717    - 
Commercial business   105    -    225    330    138,291    - 
Consumer   -    -    -    -    30    - 
Total originated loans   3,001    2,534    1,393    6,928    1,025,864    - 
Acquired Loans                              
Real estate loans:                              
Residential real estate   -    -    109    109    2,823    - 
Commercial real estate   307    -    1,124    1,431    50,242    224 
Construction   135    -    774    909    98    774 
Home equity   294    -    183    477    6,888    - 
Commercial business   1,371    -    241    1,612    26,409    84 
Consumer   2    -    -    2    1,907    - 
Total acquired loans   2,109    -    2,431    4,540    88,367    1,082 
Total loans  $5,110   $2,534   $3,824   $11,468   $1,114,231   $1,082 

 

 29 
 

  

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

   As of December 31, 2014 
                       Carrying 
                       Amount > 
           Greater           90 Days 
   31-60 Days   61-90 Days   Than 90   Total Past       and 
   Past Due   Past Due   Days   Due   Current   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 September 30, 2015 and December 31, 2014:

 

   September 30,   December 31, 
   2015   2014 
   (In thousands) 
Commercial real estate   1,603    3,220 
Home equity   396    - 
Commercial business   368    142 
Total  $2,367   $3,362 

 

The amount of income that was contractually due but not recognized on originated nonaccrual loans totaled $38 thousand and $18 thousand, respectively for the three months ended September 30, 2015, and 2014. The amount of income that was contractually due but not recognized on originated nonaccrual loans totaled $110 thousand and $51 thousand, respectively for the nine months ended September 30, 2015, and 2014. There was no actual interest income recognized on these loans for the three months ended September 30, 2015, and 2014. There was $3 thousand and $4 thousand actual interest income recognized on these loans for the nine months ended September 30, 2015, and 2014.

 

 30 
 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

At September 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 $1.1 million and $1.9 million, respectively at September 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.

 

 31 
 

  

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

The following table summarizes impaired loans by portfolio segment as of September 30, 2015 and December 31, 2014:

 

   Carrying Amount   Unpaid Principal Balance   Associated Allowance 
   September 30, 2015   December 31, 2014   September 30, 2015   December 31, 2014   September 30, 2015   December 31, 2014 
           (In thousands)         
Originated                              
Impaired loans without a valuation allowance:                              
Residential real estate  $-   $864   $-