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Bankwell Financial Group, Inc. - Quarter Report: 2015 September (Form 10-Q)

  

 

  

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

 

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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)

 

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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)

 

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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)

 

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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)

 

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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)

 

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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)

 

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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.

 

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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.

 

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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   $-   $864   $-   $- 
Commercial real estate   4,299    4,543    4,299    4,544    -    - 
Home equity   83    91    83    91    -    - 
Commercial business   1,115    1,145    1,133    1,153    -    - 
Total impaired loans without a valuation allowance   5,497    6,643    1,216    6,652    -    - 
                               
Impaired loans with a valuation allowance:                              
Residential real estate   864    -    864    -    2    - 
Commercial real estate   444    453    444    453    22    23 
Home Equity   343    -    345    -    7    - 
Commercial business   488    556    488    556    8    10 
Total impaired loans with a valuation allowance   2,139    1,009    2,141    1,009    39    33 
Total originated impaired loans  $7,636   $7,652   $3,357   $7,661   $39   $33 
                               
Acquired                              
Impaired loans without a valuation allowance:                              
Commercial real estate  $483   $-   $534   $-   $-   $- 
Commercial business   424    629    424    629    -    - 
Home equity   198    -    200    -    -    - 
Total impaired loans without a valuation allowance   1,105    629    1,158    629    -    - 
                               
Impaired loans with a valuation allowance:                              
Commercial Real Estate   150    -    150    -    10    - 
Commercial business   684    -    692    -    24    - 
Consumer   5    -    5    -    5    - 
Total impaired loans with a valuation allowance   839    -    847    -    39    - 
Total acquired impaired loans  $1,944   $629   $2,005   $629   $39   $- 

 

 32 
 

  

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 September 30, 2015 and December 31, 2014:

 

   Average Recorded Investment   Interest Income Recognized 
   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   $-   $28 
Commercial real estate   4,312    4,034    98    223 
Home equity   87    95    2    3 
Commercial business   1,132    1,226    32    52 
Total impaired loans without a valuation allowance   5,531    6,219    132    306 
                     
Impaired loans with a valuation allowance:                    
Residential real estate   864    -    21    - 
Commercial real estate   448    457    21    29 
Home Equity   344    -    6    - 
Commercial business   521    596    21    32 
Total impaired loans with a valuation allowance   2,177    1,053    69    61 
Total originated impaired loans  $7,708   $7,272   $201   $367 
                     
Acquired                    
Impaired loans without a valuation allowance:                    
Commercial real estate  $453   $-   $-   $- 
Commercial business   440    607    15    28 
Home equity   199    -    2    - 
Total impaired loans without a valuation allowance   1,092    607    17    28 
                     
Impaired loans with a valuation allowance:                    
Commercial real estate   152    -    3    - 
Commercial business   711    -    11    - 
Consumer   6    -    -    - 
Total impaired loans with a valuation allowance   869    -    14    - 
Total acquired impaired loans  $1,961   $607   $31   $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.

 

 33 
 

  

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

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.

 

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 September 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 September 30,                        
Commercial real estate   -    -   $-   $-   $-   $- 
Commercial business   -    1    -    241    -    241 
Total   -    1   $-   $241   $-   $241 

 

       Outstanding Recorded Investment 
   Number of Loans   Pre-Modification   Post-Modification 
(Dollars in thousands)  2015   2014   2015   2014   2015   2014 
Nine Months Ended September 30,                        
Commercial real estate   3    2   $4,044   $1,324   $4,044   $1,324 
Commercial business   1    4    44    796    44    796 
Total   4    6   $4,088   $2,120   $4,088   $2,120 

 

All TDRs at September 30, 2015 and December 31, 2014 were performing in compliance with their modified terms.

 

The following table provides information on how loans were modified as a TDR during the three and nine months ended September 30, 2015 and 2014.

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2015   2014   2015   2014 
   (In thousands)   (In thousands) 
Maturity/amortization concession  $-   $241   $825   $962 
Payment concession   -    -    -    1,158 
Maturity and payment concession   -    -    3,263    - 
Total  $-   $241   $4,088   $2,120 

 

 34 
 

  

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

There were no loans modified in a troubled debt restructuring, for which there was a payment default during the three and nine months ended September 30, 2015 and 2014, respectively.

 

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 Bank of New Canaan and the Bank of Fairfield 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 5, 2015 through December 5, 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 have been exercised as of September 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.

 

 35 
 

  

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 September 30, 2015. The warrants expire on March 6, 2018.

 

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 nine months ended September 30, 2015 and 2014, the Company paid cash dividends on preferred stock of $82 thousand. On October 29, 2015 the Company’s Board of Directors declared a $0.05 per share cash dividend, payable December 21, 2015 to shareholders of record on December 11, 2015.

 

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 unrealized gains or losses on derivatives accounted for as cash flow hedges. The Company’s total comprehensive income or loss for the three and nine months ended September 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 nine months ended September 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 June 30, 2015  $368   $(255)  $113 
Other comprehensive income (loss) before reclassifications   116    (504)   (388)
Amounts reclassified from accumulated other comprehensive income   -    -    - 
Net other comprehensive income (loss)   116    (504)   (388)
Balance at September 30, 2015  $484   $(759)  $(275)

 

 36 
 

  

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 June 30, 2014  $689   $(66)  $623 
Other comprehensive (loss) income before reclassifications   (154)   133    (21)
Amounts reclassified from accumulated other comprehensive income   -    -    - 
Net other comprehensive (loss) income   (154)   133    (21)
Balance at September 30, 2014  $535   $67   $602 

 

   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   (160)   (646)   (806)
Amounts reclassified from accumulated other comprehensive income   -    -    - 
Net other comprehensive (loss)   (160)   (646)   (806)
Balance at September 30, 2015  $484   $(759)  $(275)

 

   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 before reclassifications   111    67    178 
Amounts reclassified from accumulated other comprehensive income   -    -    - 
Net other comprehensive income   111    67    178 
Balance at September 30, 2014  $535   $67   $602 

 

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.

 

 37 
 

  

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 September 30,   Nine Months Ended September 30, 
   2015   2014   2015   2014 
   (In thousands, except per share data)   (In thousands, except per share data) 
Net income  $2,253   $1,491   $6,412   $3,841 
Preferred stock dividends   (27)   (27)   (82)   (82)
Dividends and undistributed earnings allocated to participating securities   (63)   (23)   (170)   (82)
Net income for earnings per share calculation  $2,163   $1,441   $6,160   $3,677 
                     
Weighted average shares outstanding, basic   7,045    6,483    7,039    5,099 
Effect of dilutive equity-based awards   14    19    18    25 
Weighted average shares outstanding, diluted   7,059    6,502    7,057    5,124 
Net earnings per common share:                    
Basic earnings per common share  $0.31   $0.22   $0.88   $0.72 
Diluted earnings per common share   0.31    0.22    0.87    0.72 

 

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.

 

 38 
 

  

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 September 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 September 30, 2015 were as follows:

 

               To be Well 
               Capitalized Under 
           For Capital   Prompt Corrective 
   Actual Capital   Adequacy Purposes   Action Provision 
(Dollars in thousands)  Amount   Ratio   Amount   Ratio   Amount   Ratio 
Bankwell Bank                              
September 30, 2015                              
Common Equity Tier 1 Capital to Risk-Weighted Assets  $126,831    10.75%  $52,004    4.50%  $75,116    6.50%
Total Capital to Risk-Weighted Assets   137,959    11.94%   92,451    8.00%   115,564    10.00%
Tier I Capital to Risk-Weighted Assets   124,239    10.75%   69,338    6.00%   92,541    8.00%
Tier I Capital to Average Assets   124,239    9.84%   50,508    4.00%   63,136    5.00%
                               
Bankwell Financial Group, Inc.                              
September 30, 2015                              
Common Equity Tier 1 Capital to Risk-Weighted Assets  $122,219    10.51%  $52,308    4.50%   N/A    N/A 
Total Capital to Risk-Weighted Assets   171,956    14.79%   92,993    8.00%   N/A    N/A 
Tier I Capital to Risk-Weighted Assets   133,199    11.46%   69,744    6.00%   N/A    N/A 
Tier I Capital to Average Assets   133,199    10.29%   51,760    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.

 

 39 
 

  

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 Provision 
(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 September 30, 2015, there were 465,582 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 and records option related expense over the vesting period of such awards on a straight line basis. For the nine months ended September 30, 2015 and 2014, the Company recorded expense related to options granted under the various share option plans of approximately $11 thousand and $24 thousand, respectively.

 

There were no options granted during the nine months ended September 30, 2015.

 

 40 
 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

A summary of the status of outstanding share options as of and for the nine months ended September 30, 2015 is presented below:

 

   Nine Months Ended 
   September 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   (11,495)   16.79 
Options outstanding at end of period   175,228    17.76 
           
Options exercisable at end of period   170,728    17.84 

 

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 nine months ended September 30, 2015 was $89 thousand.

 

Restricted Stock: Restricted stock provides grantees with rights to shares of common stock upon completion of a service period. 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 nine months ended September 30, 2015:

 

   Nine Months Ended 
   September 30, 2015 
       Weighted 
   Number   Average 
   of   Grant Date 
   Shares   Fair Value 
         
Unvested at beginning of period   165,862   $18.08 
Granted   51,800    18.73 
Vested   (8,307)   15.75 
Forfeited   (2,623)   17.73 
Unvested at end of period   206,732    18.34 

 

The Company's restricted stock expense for the nine months ended September 30, 2015 and 2014 was $796 thousand and $141 thousand, respectively.

 

 41 
 

 

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 $128 thousand in stock compensation expense for the nine months ended September 30, 2015 for these restricted stock awards.

 

9.Derivative Instruments

 

Information about derivative instruments at September 30, 2015 and December 31, 2014 is as follows:

 

September 30, 2015:

 

                  Fair Value 
(Dollars in thousands)  Notional   Original          Asset 
   Amount   Maturity  Received   Paid   (Liability) 
                    
Cash flow hedge:                   
Interest rate swap on FHLB advance  $25,000   4.7 years   0.33%   1.62%  $(476)
Interest rate swap on FHLB advance  $25,000   5.0 years   0.33%   1.83%   (625)
Interest rate swap on FHLB advance  $25,000   5.0 years   0.33%   1.48%   (143)
                     $(1,244)

 

December 31, 2014:

 

                  Fair Value 
(Dollars in thousands)  Notional   Original          Asset 
   Amount   Maturity  Received   Paid   (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.

 

 42 
 

 

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      
(Dollars in thousands)  Notional   Hedged  Duration of   
   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
FHLB 90-day advance  $25,000   August 26, 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 nine months ended September 30, 2015 and 2014:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
(In thousands)  2015   2014   2015   2014 
                 
Interest rate swap on FHLB advance:                
Unrealized (loss) gain recognized in accumulated other comprehensive income  $(826)  $218   $(1,058)  $111 
Income tax benefit (expense) on items recognized in accumulated other comprehensive income   322    (85)   412    (43)
Other comprehensive (loss) income  $(504)  $133   $(646)  $68 
Interest expense recognized on hedged FHLB advance  $213   $88   $578   $176 

 

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 September 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.

 

 43 
 

 

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 September 30, 2015 and December 31, 2014 were as follows:

 

   September 30, 2015 
   Carrying   Fair             
   Value   Value   Level 1   Level 2   Level 3 
   (In thousands) 
Financial Assets:                    
Cash and due from banks  $86,830   $86,830   $86,830   $-   $- 
Available for sale securities   45,023    45,023    -    45,023    - 
Held to maturity securities   11,282    11,301    -    11,301    - 
Loans held for sale   252    252    -    252    - 
Loans receivable, net   1,108,439    1,114,785    -    -    1,114,785 
Accrued interest receivable   3,831    3,831    -    -    3,831 
FHLB stock   6,918    6,918    -    -    6,918 
                          
Financial Liabilities:                         
Demand deposits  $148,732   $148,732   $-   $-   $148,732 
NOW and money market   346,850    346,850    -    -    346,850 
Savings   101,749    101,749    -    -    101,749 
Time deposits   428,358    430,602    -    -    430,602 
Advances from the FHLB   120,000    120,154    -    -    120,154 
Subordinated debentures   25,037    25,037    -    -    25,037 
Derivative liability   1,244    1,244    -    1,244    - 

 

 44 
 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

   December 31, 2014 
   Carrying   Fair             
   Value   Value   Level 1   Level 2   Level 3 
   (In thousands) 
Financial Assets:                    
Cash and due from banks  $48,559   $48,559   $48,559   $-   $- 
Available for sale securities   65,009    65,009    -    65,009    - 
Held to maturity securities   11,454    11,470    -    11,470    - 
Loans held for sale   586    586    -    586    - 
Loans receivable, net   915,981    920,031    -    -    920,031 
Accrued interest receivable   3,323    3,323    -    -    3,323 
FHLB stock   6,109    6,109    -    -    6,109 
                          
Financial Liabilities:                         
Demand deposits  $166,030   $166,030   $-   $-   $166,030 
NOW and money market   276,501    276,501    -    -    276,501 
Savings   84,457    84,457    -    -    84,457 
Time deposits   308,451    310,165    -    -    310,165 
Advances from the FHLB   129,000    128,961    -    -    128,961 
Derivative liability   186    186    -    186    - 

 

The following methods and assumptions were used by management in estimating the fair value of its financial instruments:

 

Cash and due from banks and accrued interest receivable: The carrying amount is a reasonable estimate of fair value.

 

Investment securities: Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

 

FHLB stock: The carrying value of FHLB stock approximates fair value based on the most recent redemption provisions of the FHLB.

 

Loans held for sale: The fair value is based upon prevailing market prices.

 

Loans receivable: For variable rate loans which reprice frequently and have no significant change in credit risk, fair values are based on carrying values. The fair value of fixed rate loans are estimated by discounting the future cash flows using the year end rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

 

Derivative asset (liability): The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves.

 

Deposits: The fair value of demand deposits, regular savings and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit and other time deposits is estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities to a schedule of aggregated expected maturities on such deposits.

 

 45 
 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

Borrowings and Subordinated Debentures: The fair value of the Company’s borrowings and subordinated debentures is estimated using a discounted cash flow calculation that applies discount rates currently offered based on similar maturities.

 

11. Fair Value Measurements

 

The Company is required to account for certain assets and liabilities at fair value on a recurring or non-recurring basis. As discussed in Note 1, the Company determines fair value in accordance with GAAP, which defines fair value and establishes a framework for measuring fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:

 

Level 1 Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2 Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3 Significant unobservable inputs that reflect a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

Valuation techniques based on unobservable inputs are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows and the selection of discount rates that may appropriately reflect market and credit risks. Changes in these judgments often have a material impact on the fair value estimates. In addition, since these estimates are as of a specific point in time they are susceptible to material near-term changes.

 

 46 
 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

Financial instruments measured at fair value on a recurring basis

  

The following tables detail the financial instruments carried at fair value on a recurring basis at September 30, 2015 and December 31, 2014, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value. The Company had no transfers into or out of Levels 1, 2 or 3 during the three and nine months ended September 30, 2015 and the year ended December 31, 2014.

 

   Fair Value 
(In thousands)  Level 1   Level 2   Level 3 
September 30, 2015:            
Available-for-sale investment securities:               
U.S. Government and agency obligations  $-   $8,222   $- 
State agency and municipal obligations   -    17,461    - 
Corporate bonds   -    14,568    - 
Mortgage backed securities   -    4,772    - 
Derivative liability   -    (1,244)   - 
                
December 31, 2014:               
Available-for-sale investment securities:               
U.S. Government and agency obligations  $-   $24,418   $- 
State agency and municipal obligations   -    18,584    - 
Corporate bonds   -    16,325    - 
Mortgage backed securities   -    5,682    - 
Derivative liability   -    (186)   - 

 

Available for sale investment securities: The fair value of the Company's investment securities are estimated by using pricing models or quoted prices of securities with similar characteristics (i.e. matrix pricing) and are classified within Level 2 of the valuation hierarchy.

 

Derivative liabilities: The Company’s derivative liabilities consist of transactions as part of management’s strategy to manage interest rate risk. The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company has determined that the majority of the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy.

 

Financial instruments measured at fair value on a nonrecurring basis

 

Certain assets are measured at fair value on a non-recurring basis in accordance with GAAP. These include assets that are measured at the-lower-of-cost-or-market that were recognized at fair value below cost at the end of the period as well as assets that are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.

 

 47 
 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

The following table details the financial instruments carried at fair value on a nonrecurring basis at September 30, 2015 and December 31, 2014, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

 

   Fair Value 
(In thousands)  Level 1   Level 2   Level 3 
September 30, 2015:            
Impaired loans  $-   $-   $9,580 
Foreclosed real estate   -    -    1,328 
                
December 31, 2014:               
Impaired loans  $-   $-   $8,281 
Foreclosed real estate   -    -    950 

 

The following table presents information about quantitative inputs and assumptions for Level 3 financial instruments carried at fair value on a nonrecurring basis at September 30, 2015 and December 31, 2014:

 

       Valuation  Unobservable   
(Dollars in thousands)  Fair Value   Methodology  Input  Range
September 30, 2015:             
              
Impaired loans  $9,580   Appraisals  Discount for dated appraisals  8.00% - 10.00%
               
        Discounted cash flows  Discount rate  3.25% - 7.00%
               
Foreclosed real estate  $1,328   Appraisals  Discount for dated appraisals  10.00% - 66.00%
               
December 31, 2014:              
               
Impaired loans  $8,281   Appraisals  Discount for dated appraisals  -
               
        Discounted cash flows  Discount rate  3.25% to 8.25%
               
Foreclosed real estate  $950   Appraisals  Discount for dated appraisals  7.34% to 66.6%

 

Impaired loans: Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral-dependent loans calculated in accordance with ASC 310-10 when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. Collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or other assumptions. Estimates of fair value based on collateral are generally based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3. For those loans where the primary source of repayment is cash flow from operations, adjustments include impairment amounts calculated based on the perceived collectability of interest payments on the basis of a discounted cash flow analysis utilizing a discount rate equivalent to the original note rate.

 

 48 
 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

Foreclosed real estate: The Company classifies property acquired through foreclosure or acceptance of deed-in-lieu of foreclosure as foreclosed real estate and repossessed assets in its financial statements. Upon foreclosure, the property securing the loan is written down to fair value less selling costs. The write-down is based upon differences between the appraised value and the book value. Appraisals are based on observable market data such as comparable sales, however assumptions made in determining comparability are unobservable and therefore these assets are classified as Level 3 within the valuation hierarchy.

 

 49 
 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

12. Mergers and Acquisitions

 

On October 1, 2014, the Company acquired all of the outstanding common shares of Quinnipiac Bank & Trust Company (“Quinnipiac”). Quinnipiac had two banking offices primarily serving south-central Connecticut and has merged with and into Bankwell Bank.

 

Quinnipiac shareholders received 510,122 shares of the Company common stock and $3.6 million in cash. As of September 30, 2014, Quinnipiac had assets with a carrying value of approximately $117.8 million, including loans outstanding with a carrying value of approximately $97.1 million, as well as deposits with a carrying value of approximately $100.4 million and a book value of $10.1 million. The results of Quinnipiac’s operations are included in the Company’s Consolidated Statement of Income from the date of acquisition.

 

The assets and liabilities in the Quinnipiac acquisition were recorded at their fair value based on management's best estimate using information available at the date of acquisition. Consideration paid and fair values of Quinnipiac's assets acquired and liabilities assumed are summarized in the following tables:

 

Consideration paid: (In thousands)  Amount 
Cash consideration paid to Quinnipiac shareholders  $3,648 
Equity consideration paid to Quinnipiac shareholders   9,676 
Total Consideration paid   13,324 

 

Recognized amounts of identifiable assets acquired
and (liabilities) assumed: (In thousands)
  As Acquired   Fair Value
Adjustments
   As Recorded
at Acquisition
 
Cash  $6,195   $-   $6,195 
Available for sale investments securities   8,533    (29)a   8,504 
Loans   97,103    748  b   97,851 
Premises and equipment   4,046    -    4,046 
Other real estate owned   129         129 
Core deposit intangibles   -    530  c   530 
Deferred tax assets, net   1,070    (388)d   682 
Other assets   756    -    756 
Deposits   (100,391)   (252)e   (100,643)
FHLB advances   (7,000)        (7,000)
Other liabilities   (315)   -    (315)
Total identifiable net assets  $10,126   $609    10,735 
                
Goodwill            $2,589 

 

Explanation of fair value adjustments:

 

(a) The adjustment represents the mark to market adjustment on available for sale investment securities.

 

(b) The adjustment represents the adjustment of the book value of loans to their estimated fair value based on current interest rates and expected cash flows, which includes an estimate of expected loan loss inherent in the portfolio.

 

 50 
 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

(c) Represents the economic value of the acquired core deposit base (total deposits less jumbo time deposits). The core deposit intangible will be amortized over an estimated life of 8.8 years based on the double declining balance method of amortization.

 

(d) Represents net deferred tax assets resulting from the fair value adjustments related to the acquired assets and liabilities, identifiable intangibles and other purchase accounting adjustments.

 

(e) The adjustment represents the fair value of time deposits, which were valued at a premium of 0.57% as they bore somewhat higher rates than the prevailing market.

 

Except for collateral dependent loans with deteriorated credit quality, the fair values for loans acquired from Quinnipiac were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. For collateral dependent loans with deteriorated credit quality, to estimate the fair value, the Company analyzed the value of the underlying collateral of the loans, assuming the fair values of the loans were derived from the eventual sale of the collateral. Those values were discounted using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral. There was no carryover of Quinnipiac's allowance for credit losses associated with the loans that were acquired as the loans were initially recorded at fair value.

 

Information about the acquired loan portfolio subject to purchased credit impaired accounting guidance (ASC 310-30) as of October 1, 2014 was as follows:

 

(In thousands)  October 1, 2014 
Contractually required principal and interest at acquisition  $1,729 
Contractual cash flows not expected to be collected (nonaccretable discount)   (6)
Expected cash flows at acquisition   1,723 
Interest component of expected cash flows (accretable discount)   (478)
Fair value of acquired loans  $1,245 

 

13. Subordinated Debentures

 

On August 19, 2015 the Company completed a private placement of $25.5 million in aggregate principal amount of fixed rated subordinated notes (the “Notes”) to certain institutional investors. The Notes are non-callable for five years, have a stated maturity of August 15, 2025, and bear interest at a quarterly pay fixed rate of 5.75% per year to the maturity date or the early redemption date.

 

The Notes have been structured to qualify for the Company as Tier 2 capital under regulatory guidelines. The Company will use the net proceeds from the sales of the Notes for general corporate purposes, including a plan to redeem the $11.0 million outstanding of its Senior Noncumulative Perpetual Preferred Stock issued in 2011 to the U.S. Treasury under the Small Business Lending Fund Program by December 31, 2015. The Notes were assigned an investment grade rating of BBB by Kroll Bond Rating Agency.

 

14. Subsequent Events

 

Management has evaluated subsequent events for potential recognition or disclosure in the consolidated financial statements through November 9, 2015, the date upon which the Company’s consolidated financial statements were available to be issued.

 

 51 
 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

On October 8, 2015, the Bank established a new wholly-owned subsidiary, Bankwell Loan Servicing Group, Inc. (a Passive Investment Company “PIC”). The PIC was organized in accordance with Connecticut statutes to hold and manage certain loans that are collateralized by real estate. Income earned by the PIC is exempt from Connecticut income tax and any dividends paid by the PIC to the Bank are not taxable income for Connecticut income tax purposes.

 

The impact of forming the PIC will be reflected during the fourth quarter and will result in an immaterial charge to the statement of income reflecting the net impact of writing off state deferred tax assets that will no longer be realized and substantially reducing the state income tax provision.

 

 52 
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This section presents management’s perspective on our financial condition and results of operations. The following discussion and analysis should be read in conjunction with the unaudited interim consolidated financial statements and related notes contained elsewhere in this report on Form 10-Q. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the Company’s Form 10-K filed for the year ended December 31, 2014 in the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” We assume no obligation to update any of these forward-looking statements.

 

General

 

Bankwell Financial Group, Inc. is a bank holding company headquartered in New Canaan, Connecticut. Through our wholly owned subsidiary, Bankwell Bank, or the Bank, we serve small and medium-sized businesses and retail customers in greater Fairfield County, Connecticut. We also serve similar customers in greater New Haven County, Connecticut as a result of the merger with Quinnipiac. We have a history of building long-term customer relationships and attracting new customers through what we believe is our strong customer service and our ability to deliver a diverse product offering.

 

The following discussion and analysis presents our results of operations and financial condition on a consolidated basis. However, because we conduct all of our material business operations through the Bank, the discussion and analysis relates to activities primarily conducted at the Bank.

 

As a bank holding company, we generate most of our revenue from interest on loans and investments and fee-based revenues. Our primary source of funding for our loans is deposits. Our largest expenses are interest on these deposits and salaries and related employee benefits. We measure our performance primarily through our net interest margin, efficiency ratio, ratio of allowance for loan losses to total loans, return on average assets and return on average equity, among other metrics, while maintaining appropriate regulatory leverage and risk-based capital ratios.

 

Critical Accounting Policies and Estimates

 

The discussion and analysis of our results of operations and financial condition are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires us to make significant estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from our current estimates, as a result of changing conditions and future events. The current economic environment has increased the degree of uncertainty inherent in these significant estimates.

 

We believe that accounting estimates for the fair value of acquired assets, the allowance for loan losses, stock-based compensation and derivative instrument valuation are particularly critical and susceptible to significant near-term change. These accounting estimates are discussed further in the Company’s Form 10-K filed for the year ended December 31, 2014 in the section “Critical Accounting Policies and Estimates” under Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

 53 
 

 

Executive Overview

 

We are focused on becoming the “Hometown” bank and the banking provider of choice in our highly attractive market area, and to serve as a locally based alternative to our larger competitors. We aim to do this through:

 

·responsive, customer-centric products and services and a community focus;
·strategic acquisitions;
·utilization of efficient and scalable infrastructure;
·disciplined focus on risk management; and
·organic growth.

 

On November 5, 2013 we completed the merger of Wilton into Bankwell Bank.

 

On May 15, 2014, Bankwell Financial Group, Inc. priced 2,702,703 common shares in its IPO at $18.00 per share, and on May 15, 2014, Bankwell common shares began trading on the Nasdaq Stock Market. 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. We intend to use the net proceeds for general corporate purposes, which may include maintaining liquidity at the holding company, providing equity capital to the Bank to fund balance sheet growth, our working capital needs, and funding acquisitions of branches, whole financial institutions and related lines of businesses in or around our existing market that further our objectives.

 

On October 1, 2014 Quinnipiac merged with and into Bankwell Bank. Quinnipiac had one branch located in Hamden, Connecticut and a second branch located in the neighboring town of North Haven, Connecticut. The results discussed below for the three and nine months ended September 30, 2014 do not reflect any results from Quinnipiac.

 

On August 19, 2015 the Company completed a private placement of $25.5 million in aggregate principal amount of fixed rated subordinated notes (the “Notes”) to certain institutional investors. The Notes are non-callable for five years, have a stated maturity of August 15, 2025, and bear interest at a quarterly pay fixed rate of 5.75% per year to the maturity date or the early redemption date.

 

Earnings Overview

 

Net income available to common shareholders was $2.2 million, or $0.31 per diluted share, and $1.5 million, or $0.22 per diluted share, for the three months ended September 30, 2015 and 2014, respectively. Returns on average equity and average assets for the three months ended September 30, 2015 were 6.92% and 0.69%, respectively, compared to 5.02% and 0.67%, respectively, for the three months ended September 30, 2014.

 

Net income available to common shareholders was $6.3 million, or $0.87 per diluted share, and $3.8 million, or $0.72 per diluted share, for the nine months ended September 30, 2015 and 2014, respectively. Returns on average equity and average assets for the nine months ended September 30, 2015 were 6.45% and 0.74%, respectively, compared to 5.84% and 0.62%, respectively, for the nine months ended September 30, 2014.

 

For the three months ended September 30, 2015, we had net interest income of $10.9 million, an increase of $3.3 million, or 43.7%, over the three months ended September 30, 2014. Our net interest margin (fully taxable equivalent basis) for the three months ended September 30, 2015 and 2014 was 3.67% and 3.69%, respectively. We experienced an increase in our non-interest income, which totaled $1.2 million for the three months ended September 30, 2015 representing 10.0% of our total revenue, up from $757 thousand, or 9.1% of total revenue, for the three months ended September 30, 2014.

 

 54 
 

 

For the nine months ended September 30, 2015, we had net interest income of $31.6 million, an increase of $9.7 million, or 44.1%, over the nine months ended September 30, 2014. Our net interest margin (fully taxable equivalent basis) for the nine months ended September 30, 2015 and 2014 was 3.83% and 3.78%, respectively. We experienced an increase in our non-interest income, which totaled $2.6 million for the nine months ended September 30, 2015 representing 7.7% of our total revenue, up from $2.2 million, or 9.2% of total revenue, for the nine months ended September 30, 2014.

 

Results of Operations

Net Interest Income

 

Net interest income is the difference between interest earned on loans and securities and interest paid on deposits and other borrowings, and is the primary source of our operating income. Net interest income is affected by the level of interest rates, changes in interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. Included in interest income are certain loan fees, such as deferred origination fees and late charges. The following tables and discussion present net interest income on a fully taxable equivalent, or FTE basis, by adjusting income and yields on tax-exempt loans and securities to be comparable to taxable loans and securities. We convert tax-exempt income to a FTE basis using the statutory federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit. The average balances are principally daily averages. Interest income on loans includes the effect of deferred loan fees and costs accounted for as yield adjustments. Premium amortization and discount accretion are included in the respective interest income and interest expense amounts.

 

FTE net interest income for the three months ended September 30, 2015 and 2014 was $11.1 million and $7.7 million, respectively. FTE net interest income for the nine months ended September 30, 2015 and 2014 was $31.9 million and $22.2 million, respectively. Our net interest margin decreased 2 basis points to 3.67% for the three months ended September 30, 2015, compared to the three months ended September 30, 2014 due primarily to higher rates on interest bearing deposits, driven by promotional rate increases to remain competitive in the market place and to attract additional deposits and the addition of $25.5 million of 5.75% fixed rate subordinated debentures in the third quarter of 2015, offset by higher loan prepayment penalty income and a shift in earning assets to higher yielding commercial real estate loans. Our net interest margin increased 5 basis points to 3.83% for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014 due primarily to higher loan pre-payment penalty income concentrated in the second quarter and a shift in the earning assets to higher yielding commercial real estate loans, offset by an increase in rates on interest bearing deposits driven by promotional rate increases to remain competitive in the market place and to attract additional deposits and the addition of $25.5 million of 5.75% fixed rate subordinated debentures in the third quarter of 2015.

 

FTE basis interest income for the three months ended September 30, 2015 increased by $4.5 million, or 51.3%, to $13.3 million, compared to FTE basis interest income for the three months ended September 30, 2014 due primarily to loan growth in our commercial real estate and commercial business portfolios. Average interest-earning assets were $1.2 billion for the three months ended September 30, 2015, up by $371.4 million from the three months ended September 30, 2014. The average balance of total loans increased $385.7 million, or 55.5%, contributing $4.6 million to the increase in interest income. Commercial real estate and commercial business loan average balances grew by $280.4 million and $56.7 million, respectively. The average yield on interest earning assets increased from 4.11% from the three months ended September 30, 2014 to 4.31% for the three months ended September 30, 2015 due mainly to a change in portfolio mix towards higher yielding commercial and commercial real estate loans.

 

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FTE basis interest income for the nine months ended September 30, 2015 increased by $12.3 million, or 49.3%, to $37.2 million, compared to FTE basis interest income for the nine months ended September 30, 2014 due primarily to loan growth in our commercial real estate and commercial business portfolios, offset by lower discount accretion on acquired loans. Average interest-earning assets were $1.1 billion for the nine months ended September 30, 2015, up by $326.3 million from the nine months ended September 30, 2014. The average balance of total loans increased $338.5 million, or 50.9%, contributing $12.3 million to the increase in interest income. Commercial real estate and commercial business loan average balances grew by $241.5 million and $51.9 million, respectively. The average yield on interest earning assets increased from 4.20% from the nine months ended September 30, 2014 to 4.42% for the nine months ended September 30, 2015 due mainly to a change in portfolio mix towards higher yielding commercial and commercial real estate loans.

 

Interest expense for the three months ended September 30, 2015, increased by $1.2 million, or 107.4%, compared to interest expense for the three months ended September 30, 2014 due to a $361.3 million increase in the average balances of interest-bearing liabilities due to higher average balances in money market accounts, time accounts and borrowed money, and increased rates on deposits, primarily due to promotional rates on money markets and certificates of deposits to remain competitive in the market place and borrowed money as a result of the issuance of the subordinated debt in the third quarter of 2015.

 

Interest expense for the nine months ended September 30, 2015, increased by $2.6 million, or 97.2%, compared to interest expense for the nine months ended September 30, 2014 due to a $279.6 million increase in the average balances of interest-bearing liabilities due to higher average balances in money market accounts, time accounts and borrowed money, and increased rates on time deposits and borrowed money as a result of the issuance of the subordinated debt in the third quarter of 2015.

 

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Average Balance Sheet, FTE basis Interest and Average Yields/Rates

 

The following tables present the average balances and yields earned on interest-earning assets and average balances and weighted average rates paid on our funding liabilities for the three and nine months ended September 30, 2015 and 2014.

 

   Three Months Ended September 30, 
   2015   2014 
   Average       Yield /   Average       Yield / 
(Dollars in thousands)  Balance   Interest   Rate   Balance   Interest   Rate 
Assets:                        
Cash and Fed funds sold  $62,597   $33    0.21%  $64,752   $45    0.28%
Securities (1)   57,234    549    3.84    71,536    666    3.73 
Loans:                              
Commercial real estate   645,488    7,873    4.77    365,042    4,473    4.79 
Residential real estate   175,908    1,569    3.57    166,123    1,499    3.61 
Construction (2)   79,722    912    4.48    47,261    570    4.72 
Commercial business   157,867    2,075    5.14    101,184    1,296    5.01 
Home equity   16,422    155    3.75    12,786    121    3.75 
Consumer   2,184    27    4.87    698    15    8.75 
Acquired loans (net of mark)   2,558    51    7.91    1,327    81    24.15 
Total loans   1,080,149    12,662    4.59    694,421    8,055    4.54 
Federal Home Loan Bank stock   6,918    47    2.71    4,834    18    1.49 
Total earning assets   1,206,898    13,291    4.31%   835,543    8,784    4.11%
Other assets   89,978              47,383           
Total assets  $1,296,876             $882,926           
                               
Liabilities and shareholders' equity:                              
Interest -bearing liabilities:                              
NOW  $56,104    15    0.11%  $52,298    15    0.11%
Money market   293,150    408    0.55    175,111    218    0.49 
Savings   103,555    214    0.82    79,505    65    0.33 
Time   401,968    1,005    0.99    257,616    607    0.93 
Total interest-bearing deposits   854,777    1,642    0.76    564,530    905    0.64 
Borrowed money   118,391    583    1.95    47,333    168    1.41 
Total interest bearing liabilities   973,168    2,225    0.91%   611,863    1,073    0.70%
Noninterest-bearing deposits   161,354              138,272           
Other liabilities   33,257              14,918           
Total Liabilities   1,167,779              765,053           
Shareholders' equity   129,097              117,873           
Total liabilities and shareholders' equity  $1,296,876             $882,926           
Net interest income (3)       $11,066             $7,711      
Interest rate spread             3.40%             3.41%
Net interest margin (4)             3.67%             3.69%

 

 

(1)Average balances and yields for securities are based on amortized cost.
(2)Includes commercial and residential real estate construction.
(3)The adjustment for securities and loans taxable equivalency amounted to $149 thousand and $116 thousand, respectively, for the three months ended September 30, 2015 and 2014.
(4)Annualized net interest income as a percentage of earning assets.

 

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   Nine Months Ended September 30, 
   2015   2014 
   Average       Yield /   Average       Yield / 
(Dollars in thousands)  Balance   Interest   Rate   Balance   Interest   Rate 
Assets:                        
Cash and Fed funds sold  $37,037   $61    0.22%  $58,699   $116    0.26%
Securities (1)   61,233    1,699    3.70    53,723    1,697    4.21 
Loans:                              
Commercial real estate   583,024    21,476    4.86    341,480    12,523    4.84 
Residential real estate   174,389    4,727    3.61    161,049    4,362    3.61 
Construction (2)   71,900    2,509    4.60    46,317    1,615    4.60 
Commercial business   151,017    5,866    5.12    99,113    3,705    4.93 
Home equity   17,551    494    3.77    13,373    370    3.70 
Consumer   2,487    90    4.85    640    42    8.88 
Acquired loans (net of mark)   2,877    155    7.22    2,753    425    20.64 
Total loans   1,003,245    35,317    4.64    664,725    23,042    4.57 
Federal Home Loan Bank stock   6,741    110    2.17    4,834    54    1.48 
Total earning assets   1,108,256    37,187    4.42%   781,981    24,909    4.20%
Other assets   57,388              39,993           
Total assets  $1,165,644             $821,974           
                               
Liabilities and shareholders' equity:                              
Interest -bearing liabilities:                              
NOW  $57,017    48    0.11%  $52,544    43    0.11%
Money market   253,662    1,007    0.53    173,104    564    0.44 
Savings   95,242    492    0.69    93,328    216    0.31 
Time   341,658    2,358    0.92    224,765    1,434    0.85 
Total interest-bearing deposits   747,579    3,905    0.70    543,741    2,257    0.55 
Borrowed money   124,129    1,389    1.50    48,370    427    1.18 
Total interest bearing liabilities   871,708    5,294    0.81%   592,111    2,684    0.61%
Noninterest-bearing deposits   154,825              129,074           
Other liabilities   6,137              12,808           
Total Liabilities   1,032,670              733,993           
Shareholders' equity   132,974              87,981           
Total liabilities and shareholders' equity  $1,165,644             $821,974           
Net interest income (3)       $31,893             $22,225      
Interest rate spread             3.61%             3.59%
Net interest margin (4)             3.83%             3.78%

 

 

(1)Average balances and yields for securities are based on amortized cost.
(2)Includes commercial and residential real estate construction.
(3)The adjustment for securities and loans taxable equivalency amounted to $341 thousand and $336 thousand, respectively, for the nine months ended September 30, 2015 and 2014.
(4)Annualized net interest income as a percentage of earning assets.

 

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Effect of changes in interest rates and volume of average earning assets and average interest-bearing liabilities

 

The following table shows the extent to which changes in interest rates and changes in the volume of average earning assets and average interest-bearing liabilities have affected net interest income. For each category of earning assets and interest-bearing liabilities, information is provided relating to: changes in volume (changes in average balances multiplied by the prior year’s average interest rates); changes in rates (changes in average interest rates multiplied by the prior year’s average balances); and the total change. Changes attributable to both volume and rate have been allocated proportionately based on the relationship of the absolute dollar amount of change in each.

 

   Three Months Ended   Nine Months Ended 
   September 30, 2015 vs 2014   September 30, 2015 vs 2014 
   Increase (Decrease)   Increase (Decrease) 
(In thousands)  Volume   Rate   Total   Volume   Rate   Total 
Interest and dividend income:                        
Cash and Fed funds sold  $(1)  $(11)  $(12)  $(38)  $(17)  $(55)
Securities   (136)   19    (117)   222    (220)   2 
Loans:                              
Commercial real estate   3,420    (20)   3,400    8,897    56    8,953 
Residential real estate   88    (18)   70    362    3    365 
Construction   372    (30)   342    893    1    894 
Commercial business   744    35    779    2,010    151    2,161 
Home equity   34    -    34    117    7    124 
Consumer   21    (9)   12    75    (27)   48 
Acquired loans (net of mark)   46    (76)   (30)   18    (288)   (270)
Total loans   4,725    (118)   4,607    12,372    (97)   12,275 
Federal Home Loan Bank stock   10    19    29    26    30    56 
Total change in interest and dividend income   4,598    (91)   4,507    12,582    (304)   12,278 
Interest expense:                              
Deposits:                              
NOW   -    -    -    4    1    5 
Money market   162    28    190    302    141    443 
Savings   25    124    149    4    272    276 
Time   359    39    398    798    126    924 
Total deposits   546    191    737    1,108    540    1,648 
Borrowed money   330    85    415    822    140    962 
Total change in interest expense   876    276    1,152    1,930    680    2,610 
Change in net interest income  $3,722   $(367)  $3,355   $10,652   $(984)  $9,668 

 

Provision for Loan Losses

 

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

 

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Under accounting standards for business combinations, acquired loans are recorded at fair value with no loan loss allowance on the date of acquisition. A provision for loan losses will be recorded for the emergence of new probable and estimable losses on acquired loans which were not impaired as of the acquisition date. As of and for the three and nine months ended September 30, 2015, there was a $45 thousand provision or allowance for loan losses related to the loan portfolios that we acquired.

 

The provision for loan losses for the three months ended September 30, 2015 was $1.5 million compared to $566 thousand provision for loan losses for the three months ended September 30, 2014. The provision for loan losses for the nine months ended September 30, 2015 was $2.9 million compared to $847 thousand provision for loan losses for the nine months ended September 30, 2014. For further information, see sections titled Asset Quality and Allowance for Loan Losses.

 

Noninterest Income

 

The following tables compare noninterest income for the three and nine months ended September 30, 2015 and 2014:

 

   Three Months Ended     
   September 30,   Change 
(Dollars in thousands)  2015   2014   $   % 
Gains and fees from sales of loans  $447   $366   $81    22%
Service charges and fees   234    153    81    53 
Bank owned life insurance   182    135    47    35 
Other   348    103    245    238 
Total noninterest income  $1,211   $757   $454    60%

 

Noninterest income increased $454 thousand to $1.2 million for the three months ended September 30, 2015 compared to the three months ended September 30, 2014. During the three months ended September 30, 2015, the Company recorded $447 thousand of gains on the sale of $5.7 million of loans. During the three months ended September 30, 2014, the Company recorded $366 thousand in gains on the sale of $4.3 million of loans. Service charges and fees increased $81 thousand from $153 thousand for the three months ended September 30, 2014 to $234 thousand for the three months ended September 30, 2015, primarily driven by increased service charges on checking accounts and increased ATM and debit card fees. Other income increased $245 thousand from $103 thousand for the three months ended September 30, 2014 to $348 thousand for the three months ended September 30, 2015, primarily driven by income recognized on the pay-off of purchased credit impaired loans.

 

   Nine Months Ended     
   September 30,   Change 
(Dollars in thousands)  2015   2014   $   % 
Gains and fees from sales of loans  $885   $1,008   $(123)   (12)%
Service charges and fees   675    420    255    61 
Bank owned life insurance   549    305    244    80 
Other   535    475    60    13 
Total noninterest income  $2,644   $2,208   $436    20%

 

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Noninterest income increased $436 thousand to $2.6 million for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. During the nine months ended September 30, 2015, the Company recorded $885 thousand of gains on the sale of $13.4 million of loans. During the nine months ended September 30, 2014, the Company recorded $1.0 million in gains on the sale of $22.6 million of loans. Service charges and fees increased $255 thousand from $420 thousand for the nine months ended September 30, 2014 to $675 thousand for the nine months ended September 30, 2015, primarily driven by increased service charges on checking accounts and increased ATM and debit card fees. The cash surrender value of bank owned life insurance increased by $244 thousand due to the purchase of an additional tranche of $12.5 million in the third quarter of 2014.

 

Noninterest Expense

 

The following tables compare noninterest expense for the three and nine months ended September 30, 2015, and 2014:

 

   Three Months Ended     
   September 30,   Change 
(Dollars in thousands)  2015   2014   $   % 
Salaries and employee benefits  $3,798   $2,786   $1,012    36%
Occupancy and equipment   1,370    1,066    304    29 
Data processing   416    314    102    32 
Professional services   339    394    (55)   (14)
Marketing   288    135    153    113 
FDIC insurance   166    120    46    38 
Director fees   136    177    (41)   (23)
Foreclosed real estate   81    9    72    100 
Amortization of intangibles   51    27    24    89 
Merger and acquisition related expenses   -    145    (145)   (100)
Other   513    357    156    44 
Total noninterest expense  $7,158   $5,530   $1,628    29%

 

Noninterest expense increased $1.6 million to $7.2 million for the three months ended September 30, 2015 compared to the three months ended September 30, 2014. The increase was primarily driven by a $1.0 million increase in salaries and employee benefits. The increase in salaries and employee benefits was driven by higher staffing levels, stock based compensation, medical costs and incentive accruals. Full time equivalent employees increased 21 employees from 103 full time equivalent employees at September 30, 2014 to 124 full time equivalent employees at September 30, 2015. In addition, the increase was driven by a $304 thousand increase in occupancy and equipment. The increase in occupancy and equipment was driven by increased costs associated with the addition of the two branches added as a result of the Quinnipiac Bank acquisition and the opening of a branch in Norwalk, Connecticut.

 

   Nine Months Ended     
   September 30,   Change 
(Dollars in thousands)  2015   2014   $   % 
Salaries and employee benefits  $11,817   $9,412   $2,405    26%
Occupancy and equipment   4,029    3,162    867    27 
Data processing   1,157    949    208    22 
Professional services   1,033    1,035    (2)   (0)
Marketing   707    463    244    53 
FDIC insurance   487    345    142    41 
Director fees   424    460    (36)   (8)
Foreclosed real estate   73    21    52    248 
Amortization of intangibles   153    80    73    91 
Merger and acquisition related expenses   -    408    (408)   (100)
Other   1,610    1,134    476    42 
Total noninterest expense  $21,490   $17,469   $4,021    23%

 

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Noninterest expense increased $4.0 million to $21.5 million for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. The increase was primarily driven by a $2.4 million increase in salaries and employee benefits. The increase in salaries and employee benefits was driven by higher staffing levels, stock based compensation, medical costs and incentive accruals. In addition, the increase was driven by an $867 thousand increase in occupancy and equipment. The increase in occupancy and equipment was driven by increased costs associated with the addition of the two branches added as a result of the Quinnipiac Bank acquisition and the opening of a branch in Norwalk Connecticut.

 

Income Tax Expense

 

Income tax expense for the three months ended September 30, 2015 and 2014 totaled $1.2 million and $765 thousand, respectively. The effective tax rates for the three months ended September 30, 2015 and 2014 were 35.3%, and 33.9%, respectively. The increase in the effective tax rate is driven by fully taxable income increasing at a faster rate than tax-preferred or exempt income for the three months ended September 30, 2015 compared to the three months ended September 30, 2014.

 

Income tax expense for the nine months ended September 30, 2015 and 2014 totaled $3.4 million and $1.9 million, respectively. The effective tax rates for the nine months ended September 30, 2015 and 2014 were 34.8%, and 33.6%, respectively. The increase in the effective tax rate is driven by fully taxable income increasing at a faster rate than tax-preferred or exempt income for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.

 

Financial Condition

 

Summary

 

At September 30, 2015, total assets were $1.3 billion, a $213.8 million, or 19.4%, increase over December 31, 2014. Total loans outstanding and total deposits totaled $1.1 billion and $1.0 billion, respectively at September 30, 2015. Our credit quality remained strong, with nonperforming assets to total assets of 0.28% and the allowance for loan losses to total loans was 1.22%. Total shareholders’ equity at September 30, 2015 and December 31, 2014 was $135.8 million and $129.2 million, respectively. Tangible book value was $17.25 per share at September 30, 2015 compared to $16.35 per share at December 31, 2014.

 

Loan Portfolio

 

We originate commercial and residential real estate loans, including construction loans, commercial business loans, home equity and other consumer loans. Lending activities are primarily conducted within our market of Fairfield and New Haven Counties and the surrounding Connecticut region. Our loan portfolio is the largest category of our earning assets. 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 disclosures that follow are presented separately for the originated loan portfolio and the acquired loan portfolio.

 

Total loans before deferred loan fees and the allowance for loan losses were $1.1 billion at September 30, 2015, up by $195.9 million, or 21.07%, from December 31, 2014. Commercial real estate loans have experienced the most significant growth, up by $162.9 million.

 

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The following table compares the composition of our loan portfolio for the dates indicated:

 

(In thousands)  September 30, 2015   December 31, 2014   Change 
   Originated   Acquired   Total   Originated   Acquired   Total   Total 
Real estate loans:                            
Residential  $168,830   $2,932   $171,762   $169,833   $5,198   $175,031   $(3,269)
Commercial   632,410    51,673    684,083    458,506    62,675    521,181    162,902 
Construction   83,986    1,007    84,993    62,258    971    63,229    21,764 
Home equity   8,915    7,365    16,280    10,226    7,940    18,166    (1,886)
    894,141    62,977    957,118    700,823    76,784    777,607    179,511 
Commercial business   138,621    28,021    166,642    120,360    28,899    149,259    17,383 
Consumer   30    1,909    1,939    243    2,653    2,896    (957)
Total loans  $1,032,792   $92,907   $1,125,699   $821,426   $108,336   $929,762   $195,937 

 

Asset Quality

 

Asset quality metrics remained strong through the third quarter of 2015. Nonperforming assets totaled $3.7 million and represented 0.28% of total assets at September 30, 2015, compared to $4.3 million and 0.39% of total assets at December 31, 2014. Nonaccrual loans totaled $2.4 million at September 30, 2015, a decrease of $1.0 million compared to December 31, 2014. The balance of foreclosed real estate increased $378 thousand and totaled $1.3 million at September 30, 2015 when compared to December 31, 2014.

 

The following table presents nonperforming assets and additional asset quality data for the dates indicated:

 

   At September 30, 2015   At December 31, 2014 
(In thousands)  Originated   Acquired   Total   Originated   Acquired   Total 
Nonaccrual loans:                        
Real estate loans:                        
Commercial   970    633    1,603    3,220    -    3,220 
Home equity   -    396    396    -    -    - 
Commercial business   225    143    368    142    -    142 
Total non accrual loans   1,195    1,172    2,367    3,362    -    3,362 
Property acquired through foreclosure or repossession, net   -    1,328    1,328    -    950    950 
Total nonperforming assets  $1,195   $2,500   $3,695   $3,362   $950   $4,312 
                               
Nonperforming assets to total assets   0.09%   0.19%   0.28%   0.31%   0.09%   0.39%
Nonaccrual loans to total loans   0.12%   1.26%   0.21%   0.41%   0.00%   0.36%
Total past due loans to total loans   0.67%   4.89%   1.02%   0.42%   4.23%   0.86%
Accruing loans 90 days or more past due  $-   $1,082   $1,082   $216   $1,782   $1,998 

 

Allowance for Loan Losses

 

Establishing an appropriate level of allowance for loan losses, or the allowance, involves a high degree of judgment. We use a methodology to systematically measure the amount of estimated loan loss exposure inherent in our loan portfolio for purposes of establishing a sufficient allowance for loan losses. We evaluate the adequacy of the allowance at least quarterly. Our allowance for loan losses is our best estimate of the probable loan losses inherent in our loan portfolio as of the balance sheet date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by charge-offs on loans.

 

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At September 30, 2015, our allowance for loan losses was $13.7 million and represented 1.22% of total loans, compared to $10.9 million, or 1.17% of total loans, at December 31, 2014. The net increase in the allowance primarily reflects a provision of $2.9 million.

 

The following tables present the activity in our allowance for loan losses and related ratios for the dates indicated, and include both originated and acquired allowance activity:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
(Dollars in thousands)  2015   2014   2015   2014 
Balance at beginning of period  $12,230   $8,985   $10,860   $8,382 
Charge-offs:                    
Construction   -    -    -    (100)
Commercial business   -    -    (15)   - 
Consumer   -    -    (6)   (1)
Total charge-offs   -    -    (21)   (101)
Recoveries:                    
Consumer   1    1    5    424 
Total recoveries   1    1    5    424 
Net (recoveries) charge-offs   (1)   (1)   16    (323)
Provision charged to earnings   1,489    566    2,876    847 
Balance at end of period  $13,720   $9,552   $13,720   $9,552 
Net charge-offs (recoveries) to average loans   0.00%   0.00%   0.00%   (0.05)%
Allowance for loan losses to total loans   1.22%   1.28%   1.22%   1.28%

 

The following tables present the allocation of the allowance for loan losses and the percentage of these loans to total loans for the dates indicated:

 

   At September 30,   At December 31, 
   2015   2014 
       Percent of       Percent of 
       Loan       Loan 
(Dollars in thousands)  Amount   Portfolio   Amount   Portfolio 
Residential real estate  $1,414    15.26%  $1,431    18.83%
Commercial real estate   7,564    60.77    5,480    56.06 
Construction   1,537    7.55    1,102    6.80 
Home equity   180    1.45    205    1.95 
Commercial business   3,017    14.80    2,638    16.05 
Consumer   8    0.17    4    0.31 
Total allowance for loan losses  $13,720    100.00%  $10,860    100.00%

 

The allocation of the allowance for loan losses at September 30, 2015 reflects our assessment of credit risk and probable loss within each portfolio. We believe that the level of the allowance for loan losses at September 30, 2015 is appropriate to cover probable losses.

 

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Investment Securities

 

At September 30, 2015, the carrying value of our investment securities portfolio totaled $56.3 million and represented 4% of total assets, compared to $76.5 million and 7% of total assets at December 31, 2014. The decrease of $20.2 million, or 26%, primarily reflects early calls and scheduled maturities of U.S. Government agency obligations. We purchase investment grade securities with a focus on earnings, duration exposure and for use as collateral for public funds. There were no purchases or sales of available-for-sale investment securities during the first, second or third quarters of 2015.

 

The net unrealized gain position on our investment portfolio at September 30, 2015 and December 31, 2014 was $813 thousand and $1.1 million, respectively and included gross unrealized losses of $390 thousand and $290 thousand, respectively. The gross unrealized losses were concentrated in U.S. Government, agency obligations and State agency and municipal obligations, mainly reflecting interest rate fluctuation since date of purchase. At September 30, 2015, we determined that all unrealized losses are temporary.

 

Sources of Funds

 

Total deposits were $1.0 billion at September 30, 2015, an increase of $190.3 million, from the balance at December 31, 2014 primarily reflecting increases in certificates of deposits and money market accounts. Certificates of deposit increased $119.9 million from $308.5 million at December 31, 2014 to $428.4 million at September 30, 2015. Money markets increased $80.7 million from $216.2 million at December 31, 2014 to $296.9 million at September 30, 2015. Brokered deposits totaled $69.6 million at September 30, 2015 and represent customer money reciprocal deposits for customers that desire FDIC protection and one way CDARS. Brokered deposits are utilized as an additional source of funding.

 

We utilize advances from the Federal Home Loan Bank of Boston, or FHLBB, as part of our overall funding strategy and to meet short-term liquidity needs. Total FHLBB advances were $120.0 million at September 30, 2015 compared to $129.0 million at December 31, 2014. The decrease of $9.0 million, or 7%, reflects normal operating fluctuation in our borrowings.

 

On August 19, 2015 the Company completed a private placement of $25.5 million in aggregate principal amount of fixed rated subordinated notes (the “Notes”) to certain institutional investors. The Notes are non-callable for five years, have a stated maturity of August 15, 2025, and bear interest at a quarterly pay fixed rate of 5.75% per year to the maturity date or any early redemption date. The Notes have been structured to qualify for the Company as Tier 2 capital under regulatory guidelines. The Company will use the net proceeds from the sales of the Notes for general corporate purposes, including a plan to redeem the $11.0 million outstanding of its Senior Noncumulative Perpetual Preferred Stock issued in 2011 to the U.S. Treasury under the Small Business Lending Fund Program by December 31, 2015. The Notes were assigned an investment grade rating of BBB by Kroll Bond Rating Agency.

 

Liquidity

 

The Company is required to maintain levels of liquid assets sufficient to ensure the Company’s safe and sound operation. Liquidity is defined as the ability to generate sufficient cash flows to meet all present and future funding requirements at reasonable costs. Our primary source of liquidity is deposits. Other sources of funding include discretionary use of FHLBB term advances and other borrowings, cash flows from our investment securities portfolios, loan repayments and earnings. Investment securities designated as available-for-sale may also be sold in response to short-term or long-term liquidity needs.

 

The Company anticipates that it will have sufficient funds available to meet its current loan and other commitments. As of September 30, 2015, the Company had cash and cash equivalents of $86.8 million and available-for-sale securities of $45.0 million. At September 30, 2015, outstanding commitments to originate loans totaled $38.9 million and undisbursed funds from approved lines of credit, home equity lines of credit and secured commercial lines of credit totaled $134.7 million. Time deposits scheduled to mature in one year or less at September 30, 2015 totaled $236.6 million. Historically, the Company’s deposit flow history has been that a significant portion of such deposits remain with the Company.

 

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Capital Resources

 

Total shareholders’ equity was $135.8 million at September 30, 2015 compared to $129.2 million at December 31, 2014. The increase of $6.6 million primarily reflected net income of $6.4 million for the nine months ended September 30, 2015. The ratio of total equity to total assets was 10.3% at September 30, 2015, which compares to 11.8% at December 31, 2014.

 

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. At September 30, 2015, the Bank met all capital adequacy requirements to which it was subject and exceeded the regulatory minimum capital levels to be considered well-capitalized under the regulatory framework for prompt corrective action. At September 30, 2015, the Bank’s ratio of total common equity tier 1 capital to risk-weighted assets was 10.75%, total capital to risk-weighted assets was 11.94%, Tier 1 capital to risk-weighted assets was 10.75% and Tier 1 capital to average assets was 9.84%.

 

In July 2013, the Federal Reserve published Basel III rules establishing a new comprehensive capital framework of U.S. banking organizations. Under the rules, effective January 1, 2015 for the Company and Bank, the minimum capital ratios will be a) 4.5% “Common Equity Tier 1” to risk-weighted assets, b) 6.0% Tier 1 capital to risk weighted assets and c) 8.0% total capital to risk-weighted assets. In addition, the new regulations will impose certain limitations on dividends, share buy-backs, discretionary payments on Tier 1 instruments and discretionary bonuses to executive officers if the organization does not maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of its risk-weighted assets, in addition to the amount needed to meet its minimum risk-based capital requirements, phased in over a 5 year period until January 1, 2019. Accordingly, while these proposed rules are slated for phase in commencing January 1, 2015 (and the capital conservation buffer beginning January 1, 2016), the Company believes it is well positioned to meet the requirements as they become effective.

 

On May 15, 2014, Bankwell Financial Group, Inc. priced 2,702,703 common shares in its initial public offering at $18.00 per share, and on May 15, 2014, Bankwell common shares began trading on the Nasdaq Stock Market. 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.

 

The Company’s Board of Directors declared a $0.05 per share cash dividend, payable December 21, 2015 to shareholders of record on December 11, 2015.

 

Interest Rate Sensitivity Analysis

 

We measure interest rate risk using simulation analysis to calculate earnings and equity at risk. These risk measures are quantified using simulation software from one of the leading firms in the field of asset/liability modeling. Key assumptions relate to the behavior of interest rates and spreads, prepayment speeds and the run-off of deposits. From such simulations, interest rate risk, or IRR, is quantified and appropriate strategies are formulated and implemented. We manage IRR by using two primary risk measurement techniques: simulation of net interest income and simulation of economic value of equity. These two measurements are complementary and provide both short-term and long-term risk profiles for the Company. Because income simulations assume that our balance sheet will remain static over the simulation horizon, the results do not reflect adjustments in strategy that the Asset and Liability Committee could implement in response to rate shifts.

 

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We use two sets of standard scenarios to measure net interest income at risk; Parallel Ramp and Parallel Shock. For the Parallel Ramp scenario, rate changes are ramped over a twelve-month horizon based upon a parallel yield curve shift and then maintained at those levels over the remainder of the simulation horizon. The Parallel Shock scenario assumes instantaneous parallel movements in the yield curve compared to the current yield curve. Simulation analysis involves projecting a future balance sheet structure and interest income and expense under the various rate scenarios. Internal policy regarding internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net income at risk for the subsequent one-year period should not decline by more than: 6% for a 100 basis point shift; 12% for a 200 basis point shift and 18% for a 300 basis point shift.

 

The following tables set forth the estimated percentage change in our net interest income at risk over one-year simulation periods beginning September 30, 2015 and December 31, 2014:

 

Parallel Ramp  Estimated Percent Change 
   in Net Interest Income 
   September 30,   December 31, 
Rate Changes (basis points)  2015   2014 
-100   (1.29)%   (0.95)%
+200   (2.08)   (4.00)

 

Parallel Shock  Estimated Percent Change 
   in Net Interest Income 
   September 30,   December 31, 
Rate Changes (basis points)  2015   2014 
-100   (3.33)%   (3.26)%
+100   (1.48)   (3.07)
+200   (1.26)   (5.61)
+300   (1.93)   (9.00)

 

We conduct economic value of equity at risk simulation in tandem with net interest income simulations, to ascertain a longer term view of our interest rate risk position by capturing longer-term re-pricing risk and options risk embedded in the balance sheet. It measures the sensitivity of economic value of equity to changes in interest rates. Economic value of equity at risk simulation values only the current balance sheet and does not incorporate the growth assumptions used in income simulation. As with the net interest income simulation, this simulation captures product characteristics such as loan resets, re-pricing terms, maturity dates, rate caps and floors. Key assumptions include loan prepayment speeds, deposit pricing elasticity and non-maturity deposit attrition rates. These assumptions can have significant impacts on valuation results as the assumptions remain in effect for the entire life of each asset and liability. We conduct non-maturity deposit behavior studies on a periodic basis to support deposit assumptions used in the valuation process. All key assumptions are subject to a periodic review.

 

Economic value of equity at risk is calculated by estimating the net present value of all future cash flows across various parallel shock scenarios based on existing assets and liabilities compared to current interest rates. The base case scenario assumes that current interest rates remain unchanged in the future.

 

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

 

   Estimated Percent Change 
   in Economic Value of Equity 
   September 30,   December 31, 
Rate Changes (basis points)  2015   2014 
-100   (5.70)%   (0.50)%
+100   (4.40)   (8.50)
+200   (10.30)   (18.20)
+300   (15.50)   (26.90)

 

The interest rate risk position remains liability sensitive in the near-term with an emerging asset sensitive bias throughout the longer-term simulation horizon. The expected exposure over the first two to three years of the simulation has been reduced due to inflated overnight cash positions and an additional $25 million interest rate swap. The Bank remains within all internally established policies for interest rate risk and the economic value of equity calculation.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Interest Rate Risk Management

 

Interest rate risk management is our primary market risk. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Sensitivity Analysis” herein for a discussion of our management of our interest rate risk.

 

Inflation Risk Management

 

Inflation has an important impact on the growth of total assets in the banking industry and causes a need to increase equity capital higher than normal levels in order to maintain an appropriate equity-to-assets ratio. We cope with the effects of inflation by managing our interest rate sensitivity position through our asset/liability management program, and by periodically adjusting our pricing of services and banking products to take into consideration current costs.

 

Item 4. Controls and Procedures

 

(a)Evaluation of disclosure controls and procedures:

 

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period reported on in this report, the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiary) required to be included in the Company’s periodic SEC filings.

 

(b)Change in internal controls:

 

There has been no change in the Company’s internal controls over financial reporting during the quarter that has materially affected, or is reasonably likely to affect, the Company’s internal control over financial reporting.

 

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

 

The Company and the Bank are periodically involved in various legal proceedings as normal incident their businesses. In the opinion of management, no material loss is expected from any such lawsuit.

 

Item 1a. Risk Factors

 

There have been no material changes in risk factors previously disclosed in the Company’s Form 10-K dated March 16, 2015, filed with the SEC.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

On August 19, 2015, the Company completed the offering and sale of $25,500,000 aggregate principal amount of its fixed rate 5.75% Subordinated Notes due August 15, 2025 (the "Notes"). The Notes were offered pursuant to a private placement of securities to accredited institutional investors and a Note Purchase Agreement. The Notes provide for quarterly interest payments only with the principal due in full on August 15, 2025, unless paid earlier. The Company, in its discretion, shall have the right to redeem or prepay any or all of the Notes, without premium or penalty prior to August 15, 2025: (a) in whole or in part, at any time on or after August 15, 2020 and prior to August 15, 2025, but in all cases in a principal amount with integral multiples of $1,000, on any interest payment date; or (b) in whole, at any time, upon the occurrence of a Tier 2 Capital Event or a Tax Event as defined in the Notes, or if the Company is required to register as an investment company pursuant to the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.). Any such redemption will be at a price equal to 100% of the principal amount of the Note to be redeemed or prepaid on such date, plus interest accrued and unpaid to, but excluding, the date of redemption or prepayment. Keefe, Bruyette & Woods, A Stifel Company, served as the sole placement agent for the private offering, with an underwriting discount of 1.5% ($382,500). The Company plans to use the net proceeds from the sales of the Notes for general corporate purposes, including to redeem the approximately $11.0 million outstanding of its Senior Noncumulative Perpetual Preferred Stock issued in 2011 to the U.S. Treasury under the Small Business Lending Fund Program. The Notes were assigned an investment grade rating of BBB by Kroll Bond Rating Agency.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

None.

 

Item 5. Other Information

None.

 

Item 6. Exhibits

 

The following exhibits are filed herewith:

 

31.1Certification of Christopher R. Gruseke pursuant to Rule 13a-14(a)
  
31.2Certification of Ernest J. Verrico, Sr. pursuant to Rule 13a-14(a)
  
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32Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
101The following materials from Bankwell Financial Group, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2015, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Statements of Financial Condition; (ii) Consolidated Statement of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements.

 

Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Bankwell Financial Group, Inc.
   
Date: November 9, 2015 /s/ Christopher R. Gruseke
  Christopher R. Gruseke
  President and Chief Executive Officer
   
Date: November 9, 2015 /s/ Ernest J. Verrico, Sr.
  Ernest J. Verrico, Sr.
  Executive Vice President and Chief
  Financial Officer
  (Principal Financial and Accounting
  Officer)

 

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