UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the quarterly period ended March 31, 2014
 
¨
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.
¨ Yes   þ 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  ¨
  Non-accelerated filer    þ    (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 May 30, 2014, there were 6,594,185 shares of the registrant’s common stock outstanding.
 
 
 

 

 
Bankwell Financial Group, Inc.
Form 10-Q                                     
 
Table of Contents

 
   
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SIGNATURES
 
   
CERTIFICATIONS
 
 
 
 

 

 
PART 1 – FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
Bankwell Financial Group, Inc.
 
Consolidated Balance Sheets - (unaudited)
 
(Dollars in thousands, except share data)
   
March 31,
   
December 31,
 
   
2014
   
2013
 
             
ASSETS
           
Cash and due from banks
  $ 82,246     $ 82,013  
Held to maturity investment securities, at amortized cost (Note 2)
    13,780       13,816  
Available for sale investment securities, at fair value (Note 2)
    35,557       28,597  
Loans held for sale
    -       100  
Loans receivable (net of allowance for loan losses of $8,603 at March 31, 2014 and $8,382 at December 31, 2013) (Note 3)
    646,583       621,830  
Foreclosed real estate
    829       829  
Accrued interest receivable
    2,344       2,360  
Federal Home Loan Bank stock, at cost
    4,834       4,834  
Premises and equipment, net
    8,060       7,060  
Bank-owned life insurance
    10,116       10,031  
Other intangible assets
    454       481  
Deferred income taxes, net
    5,514       5,845  
Other assets
    1,738       1,822  
Total assets
  $ 812,055     $ 779,618  
                 
LIABILITIES AND SHAREHOLDERS EQUITY
               
Liabilities
               
Deposits
               
Noninterest bearing deposits
  $ 119,656     $ 118,618  
Interest bearing deposits
    559,567       542,927  
Total deposits
    679,223       661,545  
                 
Advances from the Federal Home Loan Bank
    59,000       44,000  
Accrued expenses and other liabilities
    2,726       4,588  
Total liabilities
    740,949       710,133  
                 
Commitments and contingencies
               
                 
Shareholders’ equity (Notes 4, 5 and 7)
               
Preferred stock, senior noncumulative perpetual, Series C, no par; 10,980 shares issued at March 31, 2014 and December 31, 2013, respectively; liquidation value of $1,000 per share
    10,980       10,980  
Common stock, no par value; 10,000,000 shares authorized, 3,891,690 and 3,876,393 shares issued at March 31, 2014 and December 31, 2013, respectively
    52,446       52,105  
Retained earnings
    7,072       5,976  
Accumulated other comprehensive income
    608       424  
Total shareholders’ equity
    71,106       69,485  
                 
Total liabilities and shareholders’ equity
  $ 812,055     $ 779,618  
 
See accompanying notes to consolidated financial statements (unaudited) 
3
 

 

  
Bankwell Financial Group, Inc.
 
Consolidated Statements of Income – (unaudited)
 
(Dollars in thousands, except per share amounts)
   
Three Months Ended
 
   
March 31,
 
   
2014
   
2013
 
             
Interest income
           
Interest and fees on loans
  $ 7,428     $ 6,299  
Interest and dividends on securities
    411       367  
Interest on cash and cash equivalents
    22       10  
Total interest income
    7,861       6,676  
                 
Interest expense
               
Interest expense on deposits
    622       439  
Interest on Federal Home Loan Bank advances
    93       152  
Total interest expense
    715       591  
                 
Net interest income
    7,146       6,085  
                 
Provision for loan losses
    211       190  
                 
Net interest income after provision for loan losses
    6,935       5,895  
                 
Noninterest income
               
Gains and fees from sales of loans
    428       8  
Service charges and fees
    132       101  
Bank owned life insurance
    85       -  
Gain on sale of foreclosed real estate, net
    -       71  
Other
    124       104  
Total noninterest income
    769       284  
                 
Noninterest expense
               
Salaries and employee benefits
    3,337       2,492  
Occupancy and equipment
    1,068       772  
Professional services
    369       369  
Data processing
    337       256  
Marketing
    110       128  
Merger and acquisition related expenses
    141       -  
FDIC insurance
    118       130  
Director fees
    138       139  
Amortization of intangibles
    27       -  
Foreclosed real estate
    14       -  
Other
    382       312  
Total noninterest expense
    6,041       4,598  
                 
Income before income tax expense
    1,663       1,581  
                 
Income tax expense
    540       569  
                 
Net income
  $ 1,123     $ 1,012  
                 
Preferred stock dividends
    (27 )     (27 )
                 
Net income attributable to common stockholders
  $ 1,096     $ 985  
                 
Earnings per common share - basic
  $ 0.28     $ 0.31  
Earnings per common share - diluted
    0.28       0.30  
 
 See accompanying notes to consolidated financial statements (unaudited) 
 
4
 

 

 
Bankwell Financial Group, Inc.
 
Consolidated Statements of Comprehensive Income – (unaudited)
 
(In thousands)
   
Three Months Ended
 
   
March 31,
 
   
2014
   
2013
 
             
Net income
  $ 1,123     $ 1,012  
                 
Other comprehensive income (loss):
               
Unrealized gains (losses) on securities:
               
Unrealized holding gains (losses) on available for sale securities
    245       (190 )
Reclassification adjustment for (gain) loss realized in net income
    -       -  
Net change in unrealized gain (loss)
    245       (190 )
Tax effect - (expense) benefit
    (95 )     74  
Unrealized gains (losses) on securities, net of tax
    150       (116 )
Unrealized gains on interest rate swap:
               
Unrealized gains on interest rate swaps designated as cash flow hedge
    87       -  
Tax effect - (expense)
    (53 )     -  
Unrealized gains on interest rate swap
    34       -  
Total other comprehensive income (loss)
    184       (116 )
Comprehensive income
  $ 1,307     $ 896  
 
See accompanying notes to consolidated financial statements (unaudited) 
 
5
 

 

 
Bankwell Financial Group, Inc.
 
Consolidated Statements of Shareholders’ Equity – (unaudited)
 
(In thousands)
                   
Accumulated
       
                     
Other
       
   
Preferred
   
Common
   
Retained
   
Comprehensive
       
    Stock    
Stock
    Earnings    
Income (Loss)
   
Total
 
                               
Balance at December 31, 2012
  $ 10,980     $ 38,117     $ 926     $ 1,511     $ 51,534  
Net income
    -       -       1,012       -       1,012  
Other comprehensive loss, net of tax
    -       -       -       (116 )     (116 )
Preferred stock dividends
    -       -       (27 )     -       (27 )
Stock based compensation expense
    -       68       -       -       68  
Capital from exercise of stock options
    -       21       -       -       21  
Capital from private placement
    -       7,325       -       -       7,325  
                                         
Balance at March 31, 2013
  $ 10,980     $ 45,531     $ 1,911     $ 1,395     $ 59,817  
                                         
                       
Accumulated
         
                           
Other
         
    Preferred    
Common
    Retained    
Comprehensive
         
    Stock    
Stock
    Earnings    
Income (Loss)
   
Total
 
                                         
Balance at December 31, 2013
  $ 10,980     $ 52,105     $ 5,976     $ 424     $ 69,485  
Net income
    -       -       1,123       -       1,123  
Other comprehensive income, net of tax
    -       -       -       184       184  
Preferred stock dividends
    -       -       (27 )     -       (27 )
Stock based compensation expense
    -       150       -       -       150  
Capital from exercise of stock options
    -       191       -       -       191  
                                         
Balance at March 31, 2014
  $ 10,980     $ 52,446     $ 7,072     $ 608     $ 71,106  
  
See accompanying notes to consolidated financial statements (unaudited) 
 
6
 

 

 
Bankwell Financial Group, Inc.
 
Consolidated Statements of Cash Flows – (unaudited)
 
(In thousands)
   
Three Months Ended
 
   
March 31,
 
   
2014
   
2013
 
Cash flows from operating activities
           
Net income
  $ 1,123     $ 1,012  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Net amortization of premiums and discounts on investment securities
    24       27  
Provision for loan losses
    211       190  
Benefit from deferred taxes
    89       -  
Depreciation and amortization
    206       156  
Increase in cash surrender value of  bank-owned life insurance
    (85 )     -  
Loan principal sold
    (16,040 )     (443 )
Proceeds from sales of loans
    16,569       451  
Net gain on sales of loans
    (428 )     (8 )
Equity-based compensation
    150       68  
Net accretion of purchase accounting adjustments
    (204 )     -  
Gain on sale of foreclosed real estate
    -       (71 )
Net change in:
               
Deferred loan fees
    174       35  
Accrued interest receivable
    16       (55 )
Other assets
    265       435  
Accrued expenses and other liabilities
    (1,864 )     (3,214 )
Net cash provided (used) by operating activities
    206       (1,417 )
                 
Cash flows from investing activities
               
Proceeds from principal repayments on available for sale securities
    110       255  
Proceeds from principal repayments on held to maturity securities
    34       60  
Net proceeds from sales and calls of available for sale securities
    400       -  
Purchases of available for sale securities
    (7,247 )     -  
Net increase in loans
    (24,911 )     (28,702 )
Purchases of premises and equipment
    (1,205 )     (94 )
Redemption of Federal Home Loan Bank stock
    -       102  
Proceeds from sale of foreclosed real estate
    -       981  
Net cash used by investing activities
    (32,819 )     (27,398 )
 
 See accompanying notes to consolidated financial statements (unaudited) 
 
7
 

 

 
Consolidated Statements of Cash Flows- (Continued)
 
(In thousands)
   
Three Months Ended
 
   
March 31,
 
   
2014
   
2013
 
Cash flows from financing activities
           
Net change in time certificates of deposit
  $ 13,571     $ (19,428 )
Net change in other deposits
    4,111       37,369  
Net proceeds from short term FHLB advances
    20,000       7,000  
Net repayments from long term FHLB advances
    (5,000 )     (11,000 )
Proceeds from issuance of common stock
    -       7,325  
Proceeds from exercise of options
    191       21  
Dividends paid on preferred stock
    (27 )     (27 )
Net cash provided by financing activities
    32,846       21,260  
Net increase (decrease) in cash and cash equivalents
    233       (7,555 )
Cash and cash equivalents:
               
Beginning of year
    82,013       28,927  
End of period
  $ 82,246     $ 21,372  
                 
Supplemental disclosures of cash flows information:
               
Cash paid for:
               
Interest
  $ 885     $ 640  
Income taxes
    200       128  
Noncash investing and financing activities
               
Loans transferred to foreclosed real estate
    -       -  
 
See accompanying notes to consolidated financial statements (unaudited) 
 
8
 

 

Bankwell Financial Group, Inc.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
 
1.  Nature of Operations and Summary of Significant Accounting Policies
 
Bankwell Financial Group, Inc. (the “Company” or “Bankwell”) is a federally-chartered bank-holding company located in New Canaan, Connecticut. The Company offers a broad range of financial services through its banking subsidiary, Bankwell Bank, (the “Bank”).  Bankwell 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.  See Note 12, Mergers and Acquisitions, for further information on the acquisition.
 
The Bank is a Connecticut state charted 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 region of Connecticut, with branch locations in New Canaan, Stamford, Fairfield, and Wilton, 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 interim 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 deferred taxes, the fair values of financial instruments and the determination of the allowance for loan losses.
 
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 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, 2014.  The accompanying unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Registration Statement on Form S-1 for the year ended December 31, 2013.
 
Significant concentrations of credit risk
 
Most of the Company’s activities are with customers located within Fairfield County and the surrounding region of Connecticut, and declines in property values in these areas could significantly impact the Company. The Company has significant concentrations in commercial real estate. Management does not believe they present any special risk. The Company does not have any significant concentrations in any one industry or customer.
 
Derivative Instruments
 
The Company enters into interest rate swap agreements as part of the Company’s interest rate risk management strategy. Management applies the hedge accounting provisions of Accounting Standards Codification (“ASC”) Topic 815, and formally documents at inception all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking the various hedges. Additionally, the Company uses dollar offset or regression analysis at the hedge’s inception and for each reporting period thereafter, to assess whether the derivative used in its hedging transaction is expected to be and has been highly effective in offsetting changes in the fair value or cash flows of the hedged item. The Company discontinues hedge accounting when it is determined that a derivative is not expected to be or has ceased to be highly effective as a hedge, and then reflects changes in fair value of the derivative in earnings after termination of the hedge relationship.
 
9
 

 

Bankwell Financial Group, Inc.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
 
The Company has characterized all of its interest rate swaps that qualify under Topic 815 hedge accounting as cash flow hedges. Cash flow hedges are used to minimize the variability in cash flows of assets or liabilities, or forecasted transactions caused by interest rate fluctuations, and are recorded at fair value in other assets within the consolidated balance sheet. Changes in the fair value of these cash flow hedges are initially recorded in accumulated other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any hedge ineffectiveness assessed as part of the Company’s quarterly analysis is recorded directly to earnings.
 
Reclassification
 
Certain prior period amounts have been reclassified to conform with the 2014 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.
 
Accounting Standards Update No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (“ASU 2014-04”)
 
The Update clarifies that an in substance repossession or foreclosure occurs upon either the creditor obtaining legal title to the residential real estate property or 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 legal agreement. The amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. The amendments may be adopted using either a modified retrospective transition method or a prospective transition method. Early adoption is permitted. Management does not believe the amendments will have a material impact on the Company’s Consolidated Financial Statements.
 
Accounting Standards Update No. 2013-11, Income Taxes (Topic 740), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”)
 
This Update states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments in ASU 2013-11 are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2013, with early adoption permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. Implementation of this update did not have a material effect on the Company’s consolidated financial statements.
 
10
 

 

Bankwell Financial Group, Inc.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
 
Accounting Standards Update No. 2013-10, Derivatives and Hedging (Topic 815), Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (“ASU No. 2013-10”)
 
This Update permits the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to U.S. Treasury and the London InterBank Offered Rate (“LIBOR”). The amendments also remove the restriction on using different benchmark rates for similar hedges. Prior to the amendments in this ASU, only U.S. Treasury and the LIBOR swap rates were considered benchmark interest rates. Including the Fed Funds Effective Swap Rate (OIS) as an acceptable U.S. benchmark interest rate in addition to U.S. Treasury and LIBOR rates provides a more comprehensive spectrum of interest rates to be utilized as the designated benchmark interest rate risk component under the hedge accounting guidance. The amendments in ASU 2013-10 are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The implementation of this update did not have a material effect on the Company’s consolidated financial statements.
 
Accounting Standards Update No. 2013-02 - Other Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”)
 
In February 2013, the FASB issued ASU 2013-02, to supersede and replace the presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs 2011-05 (issued in June 2011) and 2011-12 (issued in December 2011). The amendments require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. The amendments in ASU 2013-02 were effective for public entities for reporting periods beginning after December 15, 2012, however, the Company did not meet the definition of a public company until January 1, 2014, and adopted ASU 2013-02 at that time. The implementation of this update did not have a material effect on the Company’s consolidated financial statements.
 
11
 

 

 
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 March 31, 2014 were as follows:
 
   
March 31, 2014
 
   
Amortized
   
Gross Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
   
(In thousands)
 
Available for sale securities:
                       
U.S. Government and agency obligations
                   
Due from one through five years
  $ 1,000     $ -     $ (18 )   $ 982  
Due from five through ten years
    9,984       27       (226 )     9,785  
      10,984       27       (244 )     10,767  
                                 
State agency and municipal obligations
                         
Due from five through ten years
    4,114       191       -       4,305  
Due after ten years
    8,263       479       -       8,742  
      12,377       670       -       13,047  
                                 
Corporate bonds
                               
Due from one through five years
    10,234       416       (14 )     10,636  
                                 
Government-sponsored mortgage-backed securities
    1,021       86       -       1,107  
                                 
Total available for sale securities
  $ 34,616     $ 1,199     $ (258 )   $ 35,557  
                                 
Held to maturity securities:
                               
U.S. Government and agency obligations
                         
Due from one through five years
  $ 1,018     $ -     $ -     $ 1,018  
                                 
State agency and municipal obligations
                         
Due after ten years
    11,445       -       -       11,445  
                                 
Corporate bonds
                               
Due from five through ten years
    1,000       14       -       1,014  
                                 
Government-sponsored mortgage-backed securities
    317       33       -       350  
                                 
Total held to maturity securities
  $ 13,780     $ 47     $ -     $ 13,827  
 
12
 

 

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, 2013 were as follows:
 
   
December 31, 2013
 
   
Amortized
   
Gross Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
   
(In thousands)
 
Available for sale securities:
                       
U.S. Government and agency obligations
                   
Due from one through five years
  $ 1,000     $ -     $ (17 )   $ 983  
Due from five through ten years
    4,997       -       (292 )     4,705  
      5,997       -       (309 )     5,688  
                                 
State agency and municipal obligations
                         
Due from five through ten years
    3,125       152       -       3,277  
Due after ten years
    8,480       375       -       8,855  
      11,605       527       -       12,132  
                                 
Corporate bonds
                               
Due from one through five years
    9,166       411       (11 )     9,566  
                                 
Government-sponsored mortgage-backed securities
    1,133       78       -       1,211  
                                 
Total available for sale securities
  $ 27,901     $ 1,016     $ (320 )   $ 28,597  
                                 
Held to maturity securities:
                               
U.S. Government and agency obligations
                         
Due from one through five years
  $ 1,021     $ -     $ (2 )   $ 1,019  
                                 
State agency and municipal obligations
                         
Due after ten years
    11,461       -       -       11,461  
                                 
Corporate bonds
                               
Due from five through ten years
    1,000       -       (27 )     973  
                                 
Government-sponsored mortgage-backed securities
    334       28       -       362  
                                 
Total held to maturity securities
  $ 13,816     $ 28     $ (29 )   $ 13,815  
 
There were no sales of, or realized gains or losses on investment securities during the three months ended March 31, 2014 and 2013.
 
At March 31, 2014 and December 31, 2013, securities with approximate fair values of $5.8 million and $6.2 million, respectively, were pledged as collateral for public deposits.
 
13
 
BANKWELL FINANCIAL GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
 
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 March 31, 2014 and December 31, 2013:
 
   
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)
 
March 31, 2014
                                   
U.S. Government and agency obligations
  $ 4,823     $ (175 )   $ 930     $ (69 )   $ 5,753     $ (244 )
Corporate bonds
    1,078       (4 )     989       (10 )     2,067       (14 )
Total investment securities
  $ 5,901     $ (179 )   $ 1,919     $ (79 )   $ 7,820     $ (258 )
                                                 
December 31, 2013
                                               
U.S. Government and agency obligations
  $ 5,797     $ (222 )   $ 910     $ (89 )   $ 6,707     $ (311 )
Corporate bonds
    -       -       1,961       (38 )     1,961       (38 )
Total investment securities
  $ 5,797     $ (222 )   $ 2,871     $ (127 )   $ 8,668     $ (349 )
 
At March 31, 2014 and December 31, 2013, there were eight individual investment securities, respectively, in which the fair value of the security was less than the amortized cost of the security.  Management believes the unrealized losses are temporary and are the result of recent market conditions, and determined that there has been no deterioration in credit quality subsequent to purchase.
 
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. The Company’s corporate bonds are all rated above investment grade. The U.S. Government and agency obligations and the corporate bonds have experienced declines due to general market conditions. Management determined that there has been no deterioration in credit quality subsequent to purchase and believes that unrealized losses are temporary, resulting from recent market conditions.
 
14
 

 

BANKWELL FINANCIAL GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
 
3.  Loans Receivable and Allowance for Loan Losses
 
Loans acquired in connection with the Wilton acquisition in November 2013 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 March 31, 2014 and December 31, 2013:
 
   
March 31, 2014
   
December 31, 2013
 
(In thousands)
 
Originated
   
Acquired
   
Total
   
Originated
   
Acquired
   
Total
 
                                     
Real estate loans:
                                   
Residential
  $ 158,905     $ -     $ 158,905     $ 155,874     $ -     $ 155,874  
Commercial
    323,849       8,158       332,007       305,823       9,939       315,762  
Construction
    44,158       4,838       48,996       44,187       7,308       51,495  
Home equity
    9,734       3,815       13,549       9,625       3,872       13,497  
      536,646       16,811       553,457       515,509       21,119       536,628  
                                                 
Commercial business
    100,701       2,453       103,154       92,173       2,374       94,547  
                                                 
Consumer
    67       483       550       225       612       837  
Total loans
    637,414       19,747       657,161       607,907       24,105       632,012  
                                                 
Allowance for loan losses
    (8,603 )     -       (8,603 )     (8,382 )     -       (8,382 )
Deferred loan origination fees, net
    (1,991 )     -       (1,991 )     (1,785 )     (31 )     (1,816 )
Unamortized loan premiums
    16       -       16       16       -       16  
Loans receivable, net
  $ 626,836     $ 19,747     $ 646,583     $ 597,756     $ 24,074     $ 621,830  
 
Lending activities are conducted principally in the Fairfield County region of Connecticut, and consist of residential and commercial real estate loans, commercial business loans and a variety of consumer loans.  Loans may also be granted for the construction of residential homes and commercial properties. All residential and commercial mortgage loans are collateralized by first or second mortgages on real estate.
 
The following table summarizes activity in the accretable yields for the acquired loan portfolio for the three months ended March 31, 2014:
 
   
Three Months Ended
 
(In thousands)
 
March 31, 2014
 
         
Balance at beginning of period
  $ 1,418  
Acquisition
    -  
Accretion
    (140 )
Other (a)
    (50 )
Balance at end of period
  $ 1,228  
 
a)  
Represents changes in cashflows expected to be collected due to loan sales.
 
15
 

 

BANKWELL FINANCIAL GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
 
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 at the date of the credit extension, depending on the borrowers’ creditworthiness and the type of collateral. The market value of collateral is monitored on an ongoing basis and additional collateral is obtained when warranted. Real estate is the primary form of collateral. Other important forms of collateral are business assets, time deposits and marketable securities. While collateral provides assurance as a secondary source of repayment, the Company ordinarily requires the primary source of repayment to be based on the borrower’s ability to generate continuing cash flows.  The Company’s policy for collateral requires that, generally, the amount of the loan may not exceed 90% of the original appraised value of the property.  Private mortgage insurance is required for that portion of the residential 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.
 
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 Loans: This portfolio segment primarily includes home equity loans and home equity lines of credit secured by owner occupied one-to four-family residential properties.  Loans of this type are written at a maximum of 75% of the appraised value of the property and the Company requires a second lien position on the property. These loans can be affected by economic conditions and the values of the underlying properties.
 
16
 

 

BANKWELL FINANCIAL GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
 
Commercial Business Loans: 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 Loans: 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.
 
Allowance for loan losses
 
The following tables set forth the activity in the Company’s allowance for loan losses for the three months ended March 31, 2014 and 2013, by portfolio segment:
                                                 
   
Residential Real Estate
   
Commercial Real Estate
   
Construction
   
Home Equity
   
Commercial Business
   
Consumer
   
Unallocated
   
Total
 
    (In thousands)  
Three Months Ended March 31, 2014
                                           
Originated
                                               
Beginning balance
  $ 1,310     $ 3,616     $ 1,032     $ 190     $ 2,225     $ 9     $ -     $ 8,382  
Charge-offs
    -       -       -       -       -       -       -       -  
Recoveries
    -       -       -       -       -       10       -       10  
Provisions
    (12 )     151       (20 )     2       106       (16 )     -       211  
Ending balance
  $ 1,298     $ 3,767     $ 1,012     $ 192     $ 2,331     $ 3     $ -     $ 8,603  
                                                                 
Acquired
                                                               
Beginning balance
  $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
Charge-offs
    -       -       -       -       -       -       -       -  
Recoveries
    -       -       -       -       -       -       -       -  
Provisions
    -       -       -       -       -       -       -       -  
Ending balance
  $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
                                                                 
Total
                                                               
Beginning balance
  $ 1,310     $ 3,616     $ 1,032     $ 190     $ 2,225     $ 9     $ -     $ 8,382  
Charge-offs
    -       -       -       -       -       -       -       -  
Recoveries
    -       -       -       -       -       10       -       10  
Provisions
    (12 )     151       (20 )     2       106       (16 )     -       211  
Ending balance
  $ 1,298     $ 3,767     $ 1,012     $ 192     $ 2,331     $ 3     $ -     $ 8,603  
                                                                 
   
Residential Real Estate
   
Commercial Real Estate
   
Construction
   
Home Equity
   
Commercial Business
   
Consumer
   
Unallocated
   
Total
 
    (In thousands)  
Three Months Ended March 31, 2013
                                                 
                                                                 
Beginning balance
  $ 1,230     $ 3,842     $ 929     $ 220     $ 1,718     $ 2     $ -     $ 7,941  
Charge-offs
    -       -       -       -       -       (2 )     -       (2 )
Recoveries
    -       -       -       -       -       5       -       5  
Provisions
    34       45       4       (6 )     103       10       -       190  
Ending balance
  $ 1,264     $ 3,887     $ 933     $ 214     $ 1,821     $ 15     $ -     $ 8,134  
 
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.
 
17
 

 

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 March 31, 2014 and December 31, 2013:
                   
   
Originated Loans
   
Acquired Loans
   
Total
 
   
Portfolio
   
Allowance
   
Portfolio
   
Allowance
   
Portfolio
   
Allowance
 
   
(In thousands)
 
March 31, 2014
                                   
Loans individually evaluated for impairment:
                                   
Residential real estate
  $ 1,848     $ 72     $ -     $ -     $ 1,848     $ 72  
Commercial real estate
    1,117       56       -       -       1,117       56  
Construction
    -       -       -       -       -       -  
Home equity
    97       4       -       -       97       4  
Commercial business
    621       12       -       -       621       12  
Consumer
    -       -       -       -       -       -  
Subtotal
  $ 3,683     $ 144     $ -     $ -     $ 3,683     $ 144  
Loans collectively evaluated for impairment:
                                               
Residential real estate
  $ 157,057     $ 1,226     $ -     $ -     $ 157,057     $ 1,226  
Commercial real estate
    322,732       3,711       8,158       -       330,890       3,711  
Construction
    44,158       1,012       4,838       -       48,996       1,012  
Home equity
    9,637       188       3,815       -       13,452       188  
Commercial business
    100,080       2,319       2,453       -       102,533       2,319  
Consumer
    67       3       483       -       550       3  
Subtotal
  $ 633,731     $ 8,459     $ 19,747     $ -     $ 653,478     $ 8,459  
                                                 
Total
  $ 637,414     $ 8,603     $ 19,747     $ -     $ 657,161     $ 8,603  
                                                 
   
Originated Loans
   
Acquired Loans
   
Total
 
   
Portfolio
   
Allowance
   
Portfolio
   
Allowance
   
Portfolio
   
Allowance
 
   
(In thousands)
 
December 31, 2013
                                               
Loans individually evaluated for impairment:
                                               
Residential real estate
  $ 1,867     $ 73     $ -     $ -     $ 1,867     $ 73  
Commercial real estate
    1,117       56       -       -       1,117       56  
Construction
    -       -       -       -       -       -  
Home equity
    97       4       -       -       97       4  
Commercial business
    642       12       -       -       642       12  
Consumer
    -       -       -       -       -       -  
Subtotal
  $ 3,723     $ 145     $ -     $ -     $ 3,723     $ 145  
Loans collectively evaluated for impairment:
                                               
Residential real estate
  $ 154,007     $ 1,237     $ -