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 June 30, 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 June 30, 2014, there were 6,593,485 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 (Unaudited) 3
Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013 3
Consolidated Statements of Income for the three and six months ended June 30, 2014 and 2013 4
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 and 2013 5
Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2014 and 2013 6
Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013 7
Notes to Consolidated Financial Statements 9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 42
Item 3. Quantitative and Qualitative Disclosures About Market Risk 57
Item 4. Controls and Procedures 57
   
PART II – OTHER INFORMATION  
Item 1. Legal Proceedings 57
Item 1A. Risk Factors 57
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 57
Item 3. Defaults Upon Senior Securities 57
Item 4. Mine Safety Disclosures 57
Item 5. Other Information 58
Item 6. Exhibits 58
   
Signatures 59
   
Certifications 60

  

 
Table of Contents

  

PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements

Bankwell Financial Group, Inc.

Consolidated Balance Sheets - (Unaudited)

(Dollars in thousands, except share data)

 

   June 30,   December 31, 
   2014   2013 
ASSETS          
Cash and due from banks  $130,535   $82,013 
Held to maturity investment securities, at amortized cost (Note 2)   13,742    13,816 
Available for sale investment securities, at fair value (Note 2)   49,114    28,597 
Loans held for sale   325    100 
Loans receivable (net of allowance for loan losses of $8,985 at June 30, 2014 and $8,382 at December 31, 2013) (Note 3)   671,500    621,830 
Foreclosed real estate   829    829 
Accrued interest receivable   2,464    2,360 
Federal Home Loan Bank stock, at cost   4,834    4,834 
Premises and equipment, net   8,078    7,060 
Bank-owned life insurance   10,202    10,031 
Other intangible assets   427    481 
Deferred income taxes, net   5,479    5,845 
Other assets   4,258    1,822 
Total assets  $901,787   $779,618 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Liabilities          
Deposits          
Noninterest bearing deposits  $146,596   $118,618 
Interest bearing deposits   583,590    542,927 
Total deposits   730,186    661,545 
           
Advances from the Federal Home Loan Bank   47,000    44,000 
Accrued expenses and other liabilities   7,431    4,588 
Total liabilities   784,617    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 June 30, 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, 6,593,485 and 3,876,393 shares issued at June 30, 2014 and December 31, 2013, respectively   97,296    52,105 
Retained earnings   8,271    5,976 
Accumulated other comprehensive income   623    424 
Total shareholders’ equity   117,170    69,485 
           
Total liabilities and shareholders’ equity  $901,787   $779,618 

 

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   Six Months Ended 
   June 30,   June 30, 
   2014   2013   2014   2013 
Interest and dividend income                    
Interest and fees on loans  $7,558   $6,572   $14,986   $12,871 
Interest and dividends on securities   437    318    848    685 
Interest on cash and cash equivalents   49    11    71    21 
Total interest income   8,044    6,901    15,905    13,577 
                    
Interest expense                    
Interest expense on deposits   730    514    1,352    953 
Interest on Borrowings   166    139    259    291 
Total interest expense   896    653    1,611    1,244 
                     
Net interest income   7,148    6,248    14,294    12,333 
                     
Provision for loan losses   70    252    282    442 
                     
Net interest income after provision for loan losses   7,078    5,996    14,012    11,891 
                     
Noninterest income                    
Gains and fees from sales of loans   213    757    642    765 
Net gain on sale of available for sale securities   -    648    -    648 
Service charges and fees   143    101    267    198 
Bank owned life insurance   86    -    171    - 
Gain (loss) on sale of foreclosed real estate, net   -    (5)   -    66 
Other   240    23    372    131 
Total noninterest income   682    1,524    1,452    1,808 
                     
Noninterest expense                    
Salaries and employee benefits   3,284    2,752    6,625    5,252 
Occupancy and equipment   1,030    787    2,096    1,558 
Professional services   272    421    641    790 
Data processing   300    251    639    505 
Marketing   218    270    328    398 
Director fees   143    144    282    284 
Merger and acquisition related expenses   122    64    263    64 
FDIC insurance   107    100    225    230 
Amortization of intangibles   27    -    54    - 
Foreclosed real estate   -    4    12    4 
Other   394    338    774    644 
Total noninterest expense   5,897    5,131    11,939    9,729 
                     
Income before income tax expense   1,863    2,389    3,525    3,970 
                     
Income tax expense   636    921    1,175    1,490 
                     
Net income  $1,227   $1,468   $2,350   $2,480 
                     
Net income attributable to common shareholders  $1,173   $1,420   $2,235   $2,388 
                     
Earnings per common share - basic  $0.23   $0.43   $0.51   $0.74 
Earnings per common share - diluted   0.23    0.42    0.51    0.72 

 

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   Six Months Ended 
   June 30,   June 30, 
   2014   2013   2014   2013 
                 
Net income  $1,227   $1,468   $2,350   $2,480 
                     
Other comprehensive income (loss):                    
Unrealized gains (losses) on securities:                    
Unrealized holding gains (losses) on available for sale securities   188    (717)   433    (907)
Reclassification adjustment for gain realized in net income   -    (648)   -    (648)
Net change in unrealized gain (loss)   188    (1,365)   433    (1,555)
Tax effect - (expense) benefit   (73)   531    (168)   605 
Unrealized gains (losses) on securities, net of tax   115    (834)   265    (950)
Unrealized losses on interest rate swap:                    
Unrealized losses on interest rate swaps designated as cash flow hedge   (195)   -    (108)   - 
Tax effect - benefit   76    -    42    - 
Unrealized losses on interest rate swap   (119)   -    (66)   - 
Total other comprehensive income (loss)   (4)   (834)   199    (950)
Comprehensive income  $1,223   $634   $2,549   $1,530 

 

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     
               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   -    -    2,480    -    2,480 
Other comprehensive loss, net of tax   -    -    -    (950)   (950)
Preferred stock dividends   -    -    (55)   -    (55)
Stock based compensation expense   -    138    -    -    138 
Capital from exercise of stock options   -    87    -    -    87 
Capital from private placement   -    7,325    -    -    7,325 
                          
Balance at June 30, 2013  $10,980   $45,667   $3,351   $561   $60,559 
                     
               Accumulated     
               Other     
   Preferred   Common   Retained   Comprehensive     
   Stock   Stock   Earnings   Income   Total 
                     
Balance at December 31, 2013  $10,980   $52,105   $5,976   $424   $69,485 
Net income   -    -    2,350    -    2,350 
Other comprehensive income, net of tax   -    -    -    199    199 
Preferred stock dividends   -    -    (55)   -    (55)
Stock based compensation expense   -    280    -    -    280 
Capital from exercise of stock options   -    207    -    -    207 
Issuance of 2,702,703 shares, net of expenses   -    44,704    -    -    44,704 
                          
Balance at June 30, 2014  $10,980   $97,296   $8,271   $623   $117,170 

 

See accompanying notes to consolidated financial statements (unaudited)

 

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Bankwell Financial Group, Inc.

Consolidated Statements of Cash Flows – (Unaudited)

(In thousands)

  

   Six Months Ended 
   June 30, 
   2014   2013 
Cash flows from operating activities          
Net income  $2,350   $2,480 
Adjustments to reconcile net income to net cash provided by operating activities:          
Net amortization of premiums and discounts on investment securities   46    52 
Provision for loan losses   282    442 
Provision (benefit) for deferred taxes   116    (45)
Net gain on sales of available for sale securities   -    (648)
Depreciation and amortization   497    303 
Increase in cash surrender value of bank-owned life insurance   (171)   - 
Loan principal sold   (20,266)   (26,032)
Proceeds from sales of loans   18,878    26,797 
Net gain on sales of loans   (642)   (765)
Equity-based compensation   280    138 
Net accretion of purchase accounting adjustments   (296)   - 
Gain on sale of foreclosed real estate   -    (66)
Net change in:          
Deferred loan fees   332    189 
Accrued interest receivable   (104)   (75)
Other assets   (614)   (63)
Accrued expenses and other liabilities   315    (1,717)
Net cash provided by operating activities   1,003    990 
           
Cash flows from investing activities          
Proceeds from principal repayments on available for sale securities   202    465 
Proceeds from principal repayments on held to maturity securities   70    103 
Net proceeds from sales and calls of available for sale securities   400    10,194 
Purchases of available for sale securities   (18,200)   - 
Net increase in loans   (49,940)   (45,327)
Purchases of premises and equipment   (1,515)   (119)
Purchase of Federal Home Loan Bank stock   -    (134)
Proceeds from sale of foreclosed real estate   -    1,001 
Net cash used by investing activities   (68,983)   (33,817)

 

See accompanying notes to consolidated financial statements (unaudited)

 

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Consolidated Statements of Cash Flows- (Continued)

(In thousands)

  

   Six Months Ended 
   June 30, 
   2014   2013 
Cash flows from financing activities          
Net change in time certificates of deposit  $63,018   $40,096 
Net change in other deposits   5,628    17,057 
Net proceeds from short term FHLB advances   10,000    (22,000)
Net repayments from long term FHLB advances   (7,000)   - 
Proceeds from issuance of common stock   44,704    7,325 
Proceeds from exercise of options   207    87 
Dividends paid on preferred stock   (55)   (55)
Net cash provided by financing activities   116,502    42,510 
Net increase in cash and cash equivalents   48,522    9,683 
Cash and cash equivalents:          
Beginning of year   82,013    28,927 
End of period  $130,535   $38,610 
           
Supplemental disclosures of cash flows information:          
Cash paid for:          
Interest  $1,720   $1,255 
Income taxes   630    1,059 
Noncash investing and financing activities          
Loans transferred to foreclosed real estate   -    - 

 

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 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 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 region of Connecticut, with branch locations in New Canaan, Stamford, Fairfield and Wilton Connecticut. The Company has received approval from its regulators to establish a branch location in Norwalk, Connecticut, which is expected to open in the fourth quarter of 2014.

 

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 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, 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 loans. 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.

 

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Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

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.

 

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 to 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 2014-0411”)

 

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.

  

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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 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 designated 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.

 

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Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

2.   Investment Securities

 

The amortized cost, gross unrealized gains and losses and fair values of available for sale and held to maturity securities at June 30, 2014 were as follows:

 

   June 30, 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   $-   $(3)  $997 
Due from five through ten years   16,453    22    (158)   16,317 
Due after ten years   2,000    -    (1)   1,999 
    19,453    22    (162)   19,313 
State agency and municipal obligations                    
Due from five through ten years   5,551    219    (4)   5,766 
Due after ten years   8,789    564    -    9,353 
    14,340    783    (4)   15,119 
Corporate bonds                    
Due in less than one year   1,003    3    -    1,006 
Due from one through five years   9,215    412    (9)   9,618 
Due from five through ten years   3,047    2    (6)   3,043 
    13,265    417    (15)   13,667 
                     
Government-sponsored mortgage-backed securities   928    87    -    1,015 
                     
Total available for sale securities  $47,986   $1,309   $(181)  $49,114 
Held to maturity securities:                    
U.S. Government and agency obligations
Due from one through five years
  $1,016   $-   $-   $1,016 
State agency and municipal obligations
Due after ten years
   11,429    -    -    11,429 
Corporate bonds
Due from five through ten years
   1,000    14    -    1,014 
Government-sponsored mortgage-backed securities   297    34    -    331 
                     
Total held to maturity securities  $13,742   $48   $-   $13,790 

  

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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 and six months ended June 30, 2014. The realized gain on the sale of investment securities totaled $648 thousand for the three and six months ended June 30, 2013.

 

At June 30, 2014 and December 31, 2013, securities with approximate fair values of $5.9 million and $6.2 million, respectively, were pledged as collateral for public deposits.

  

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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 June 30, 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)         
June 30, 2014                              
U.S. Government and agency obligations  $4,448   $(18)  $5,853   $(144)  $10,301   $(162)
State agency & municipal obligations   910    (4)   -    -    910    (4)
Corporate bonds   2,044    (6)   991    (9)   3,035    (15)
Total investment securities  $7,402   $(28)  $6,844   $(153)  $14,246   $(181)
                               
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)

 

There were fourteen and eight individual investment securities, respectively, in which the fair value of the security was less than the amortized cost of the security at June 30, 2014 and December 31, 2013. 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 and municipal bonds are all rated above investment grade. The U.S. Government and agency obligations, state agency and municipal bonds, and 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.

 

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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 June 30, 2014 and December 31, 2013:

 

   June 30, 2014   December 31, 2013 
(In thousands)  Originated   Acquired   Total   Originated   Acquired   Total 
                         
Real estate loans:                              
Residential  $165,060   $-   $165,060   $155,874   $-   $155,874 
Commercial   349,849    7,036    356,885    305,823    9,939    315,762 
Construction   45,705    858    46,563    44,187    7,308    51,495 
Home equity   9,399    3,257    12,656    9,625    3,872    13,497 
    570,013    11,151    581,164    515,509    21,119    536,628 
Commercial business   98,669    2,003    100,672    92,173    2,374    94,547 
                               
Consumer   417    365    782    225    612    837 
Total loans   669,099    13,519    682,618    607,907    24,105    632,012 
                               
Allowance for loan losses   (8,984)   (1)   (8,985)   (8,382)   -    (8,382)
Deferred loan origination fees, net   (2,149)   -    (2,149)   (1,785)   (31)   (1,816)
Unamortized loan premiums   16    -    16    16    -    16 
Loans receivable, net  $657,982   $13,518   $671,500   $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 and six months ended June 30, 2014:

 

   Three Months Ended 
(In thousands)  June 30, 2014 
Balance at beginning of period  $1,228 
Acquisition   - 
Accretion   (117)
Other (a)   (294)
Balance at end of period  $817 
     
   Six Months Ended 
(In thousands)  June 30, 2014 
Balance at beginning of period  $1,418 
Acquisition   - 
Accretion   (257)
Other (a)   (344)
Balance at end of period  $817 

 

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

 

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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: This portfolio segment primarily includes home equity loans and home equity lines of credit secured by owner occupied one-to four-family residential properties. Loans of this type are written at a maximum of 80% of the appraised value of the property and the Company requires a second lien position on the property. These loans can be affected by economic conditions and the values of the underlying properties.

 

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Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

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. The unallocated allowance was $307 thousand and $0 at June 30, 2014 and December 31, 2013, respectively.

 

Allowance for loan losses

 

The following tables set forth the activity in the Company’s allowance for loan losses for the three and six months ended June 30, 2014 and 2013, by portfolio segment:

 

   Residential   Commercial           Commercial             
   Real Estate   Real Estate   Construction   Home Equity   Business   Consumer   Unallocated   Total 
               (In thousands)             
Three Months Ended June 30, 2014                              
Originated                                        
Beginning balance  $1,298   $3,767   $1,012   $192   $2,331   $3   $-   $8,603 
Charge-offs   -    -    -    -    -    (1)   -    (1)
Recoveries   -    -    -    -    -    413    -    413 
Provisions   94    257    (236)   (4)   (40)   (409)   307    (31)
Ending balance  $1,392   $4,024   $776   $188   $2,291   $6   $307   $8,984 
                                         
Acquired                                        
Beginning balance  $-   $-   $-   $-   $-   $-   $-   $- 
Charge-offs   -    -    (100)   -    -    -    -    (100)
Recoveries   -    -    -    -    -    -    -    - 
Provisions   -    -    100    -    1    -    -    101 
Ending balance  $-   $-   $-   $-   $1   $-   $-   $1 
                                         
Total                                        
Beginning balance  $1,298   $3,767   $1,012   $192   $2,331   $3   $-   $8,603 
Charge-offs   -    -    (100)   -    -    (1)   -    (101)
Recoveries   -    -    -    -    -    413    -    413 
Provisions   94    257    (136)   (4)   (39)   (409)   307    70 
Ending balance  $1,392   $4,024   $776   $188   $2,292   $6   $307   $8,985 

 

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Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

  

   Residential   Commercial           Commercial             
   Real Estate   Real Estate   Construction   Home Equity   Business   Consumer   Unallocated   Total 
               (In thousands)             
Three Months Ended June 30, 2013                              
                                         
Beginning balance  $1,264   $3,887   $933   $214   $1,821   $15   $-    8,134 
Charge-offs   -    (166)   -    -    -    (1)   -    (167)
Recoveries   -    -    -    -    -    5    -    5 
Provisions   62    (49)   80    (1)   (55)   72    143    252 
Ending balance  $1,326   $3,672   $1,013   $213   $1,766   $91   $143   $8,224 
                                 
   Residential   Commercial           Commercial             
   Real Estate   Real Estate   Construction   Home Equity   Business   Consumer   Unallocated   Total 
               (In thousands)             
Six Months Ended June 30, 2014                              
Originated                                        
Beginning balance  $1,310   $3,616   $1,032   $190   $2,225   $9   $-   $8,382 
Charge-offs   -    -    -    -    -    (1)   -    (1)
Recoveries   -    -    -    -    -    422    -    422 
Provisions   82    408    (256)   (2)   66    (424)   307    181 
Ending balance  $1,392   $4,024   $776   $188   $2,291   $6   $307   $8,984 
                                         
Acquired                                        
Beginning balance  $-   $-   $-   $-   $-   $-   $-   $- 
Charge-offs   -    -    (100)   -    -    -    -    (100)
Recoveries   -    -    -    -    -    -    -    - 
Provisions   -    -    100    -    1    -    -    101 
Ending balance  $-   $-   $-   $-   $1   $-   $-   $1 
                                         
Total                                        
Beginning balance  $1,310   $3,616   $1,032   $190   $2,225   $9   $-   $8,382 
Charge-offs   -    -    (100)   -    -    (1)   -    (101)
Recoveries   -    -    -    -    -    422    -    422 
Provisions   82    408    (156)   (2)   67    (424)   307    282 
Ending balance  $1,392   $4,024   $776   $188   $2,292   $6   $307   $8,985 
                                 
   Residential   Commercial           Commercial             
   Real Estate   Real Estate   Construction   Home Equity   Business   Consumer   Unallocated   Total 
               (In thousands)             
Six Months Ended June 30, 2013                               
                                         
Beginning balance  $1,230   $3,842   $929   $220   $1,718   $2   $-   $7,941 
Charge-offs   -    (166)   -    -    -    (3)   -    (169)
Recoveries   -    -    -    -    -    10    -    10 
Provisions   96    (4)   84    (7)   48    82    143    442 
Ending balance  $1,326   $3,672   $1,013   $213   $1,766   $91   $143   $8,224 

  

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Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

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.

 

The following tables are a summary, by portfolio segment and impairment methodology, of the allowance for loan losses and related portfolio balances at June 30, 2014 and December 31, 2013:

 

   Originated Loans   Acquired Loans   Total 
   Portfolio   Allowance   Portfolio   Allowance   Portfolio   Allowance 
   (In thousands) 
June 30, 2014                              
Loans individually evaluated for impairment:                              
Residential real estate  $864   $-   $-   $-   $864   $- 
Commercial real estate   2,156    -    -    -    2,156    - 
Construction   -    -    -    -    -    - 
Home equity   96    -    -    -    96    - 
Commercial business   1,031    23    533    1    1,564    24 
Consumer   -    -    -    -    -    - 
Subtotal  $4,147   $23   $533   $1   $4,680   $24 
Loans collectively evaluated for impairment:                              
Residential real estate  $164,196   $1,392   $-   $-   $164,196   $1,392 
Commercial real estate   347,693    4,024    7,036    -    354,729    4,024 
Construction   45,705    776    858    -    46,563    776 
Home equity   9,303    188    3,257    -    12,560    188 
Commercial business   97,638    2,268    1,470    -    99,108    2,268 
Consumer   417    6    365    -    782    6 
Subtotal  $664,952   $8,654   $12,986   $-   $677,938   $8,654 
Unallocated Allowance   -    307    -    -    -    307 
Total  $669,099   $8,984   $13,519   $1   $682,618   $8,985 

 

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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, 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   $-   $-   $154,007   $1,237 
Commercial real estate   304,706    3,560    9,939    -    314,645    3,560 
Construction   44,187    1,032    7,308    -    51,495    1,032 
Home equity   9,528    187    3,872    -    13,400    187 
Commercial business   91,531    2,212    2,374    -    93,905    2,212 
Consumer   225    9    612    -    837    9 
Subtotal  $604,184   $8,237   $24,105   $-   $628,289   $8,237 
                               
Total  $607,907   $8,382   $24,105   $-   $632,012   $8,382 

  

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Bankwell Financial Group, Inc. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

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.

 

The following tables are a summary of the loan portfolio quality indicators by portfolio segment at June 30, 2014 and December 31, 2013:

 

   Commercial Credit Quality Indicators 
   At June 30, 2014   At December 31, 2013 
   Commercial       Commercial   Commercial       Commercial 
   Real Estate   Construction   Business   Real Estate   Construction   Business 
   (In thousands) 
Originated loans:                              
Pass  $347,693   $45,705   $97,654   $304,469   $44,187   $91,093 
Special mention   1,045    -    415    237    -    438 
Substandard   1,111    -    600    1,117    -    642 
Doubtful   -    -    -    -    -    - 
Loss   -    -    -    -    -    - 
Total originated loans   349,849    45,705    98,669    305,823    44,187    92,173 
Acquired loans:                              
Pass   6,011    -    1,158    9,580    4,639    1,806 
Special mention   -    -    342    24    161    252 
Substandard   1,025    858    503    335    2,508    316 
Doubtful   -    -    -    -    -    - 
Loss   -    -    -    -    -    - 
Total acquired loans   7,036    858    2,003    9,939    7,308    2,374 
Total  $356,885   $46,563   $100,672   $315,762   $51,495   $94,547 

 

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Bankwell Financial Group, Inc

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

    Residential and Consumer Credit Quality Indicators  
    At June 30, 2014     At December 31, 2013  
    Residential
Real Estate
    Home Equity     Consumer     Residential
Real Estate
    Home Equity     Consumer  
    (In thousands)  
Originated loans:                                                
Pass   $ 163,642     $ 9,227     $ 417     $ 153,443     $ 9,447     $ 225  
Special mention     1,418       172       -       2,431       178       -  
Substandard     -       -       -       -       -       -  
Doubtful     -       -       -       -       -       -  
Loss     -       -       -       -       -       -  
Total originated loans     165,060       9,399       417       155,874       9,625       225  
Acquired loans:                                                
Pass     -       3,257       365       -       3,826       469  
Special mention     -       -       -       -       -       143  
Substandard     -       -       -       -       46       -  
Doubtful     -       -       -       -       -       -  
Loss     -       -       -       -       -       -  
Total acquired loans     -       3,257       365       -       3,872       612  
Total   $ 165,060     $ 12,656     $ 782     $ 155,874     $ 13,497     $ 837  

 

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.

 

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Bankwell Financial Group, Inc. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

The following tables set forth certain information with respect to our loan portfolio delinquencies by portfolio segment and amount as of June 30, 2014 and December 31, 2013:

 

   As of June 30, 2014 
                       Carrying 
                       Amount > 90 
   31-60 Days   61-90 Days   Greater Than   Total Past       Days and 
   Past Due   Past Due   90 Days   Due   Current   Accruing 
           (In thousands)         
Originated Loans                              
Real estate loans:                              
Residential real estate  $860   $-   $-   $860   $164,200   $- 
Commercial real estate   1,848    -    1,111    2,959    346,890    - 
Construction   -    -    -    -    45,705    - 
Home equity   -    -    -    -    9,399    - 
Commercial business   -    244    -    244    98,425    - 
Consumer   -    4    -    4    413    - 
Total originated loans   2,708    248    1,111    4,067    665,032    - 
Acquired Loans                              
Real estate loans:                              
Residential real estate   -    -    -    -    -    - 
Commercial real estate   -    -    436    436    6,600    436 
Construction   -    -    858    858    -    858 
Home equity   -    -    -    -    3,257    - 
Commercial business   -    -    -    -    2,003    - 
Consumer   -    -    -    -    365    - 
Total acquired loans   -    -    1,294    1,294    12,225    1,294 
Total loans  $2,708   $248   $2,405   $5,361   $677,257   $1,294 
     
   As of December 31, 2013 
                       Carrying 
                       Amount > 90 
   31-60 Days   61-90 Days   Greater Than   Total Past       Days and 
   Past Due   Past Due   90 Days   Due   Current   Accruing 
           (In thousands)         
Originated Loans                              
Real estate loans:                              
Residential real estate  $-   $-   $1,003   $1,003   $154,871   $- 
Commercial real estate   -    -    -    -    305,823    - 
Construction   -    -    -    -    44,187    - 
Home equity   -    -    -    -    9,625    - 
Commercial business   -    -    -    -    92,173    - 
Consumer   -    -    -    -    225    - 
Total originated loans   -    -    1,003    1,003    606,904    - 
Acquired Loans                              
Real estate loans:                              
Residential real estate   -    -    -    -    -    - 
Commercial real estate   -    -    797    797    9,142    797 
Construction   -    -    2,508    2,508    4,800    2,508 
Home equity   -    -    -    -    3,872    - 
Commercial business   -    -    315    315    2,059    315 
Consumer   -    -    -    -    612    - 
Total acquired loans   -    -    3,620    3,620    20,485    3,620 
Total loans  $-   $-   $4,623   $4,623   $627,389   $3,620 

  

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Bankwell Financial Group, Inc. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

Loans on nonaccrual status

 

The following is a summary of nonaccrual loans by portfolio segment as of June 30, 2014 and December 31, 2013:

 

   June 30,   December 31, 
   2014   2013 
   (In thousands) 
Residential real estate  $-   $1,003 
Commercial real estate   1,111    - 
Total  $1,111   $1,003 

 

The amount of income that was contractually due but not recognized on originated nonaccrual loans totaled $67 thousand, and $83 thousand, respectively for the six months ended June 30, 2014, and 2013. The amount of income that was contractually due but not recognized on originated nonaccrual loans totaled $44 thousand, and $60 thousand, respectively for the three months ended June 30, 2014 and 2013. There was no and $8 thousand actual interest income recognized on these loans for the six months ended June 30, 2014, and 2013.

 

At June 30, 2014 and December 31, 2013, there were no commitments to lend additional funds to any borrower on nonaccrual status.

 

The preceding table excludes acquired loans that are accounted for as purchased credit impaired loans totaling $3.3 million and $6.2 million, respectively at June 30, 2014 and December 31, 2013. 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.

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Bankwell Financial Group, Inc. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

The following table summarizes impaired loans by portfolio segment as of June 30, 2014 and December 31, 2013:

 

   Carrying  Unpaid Principal  Associated
   Amount  Balance  Allowance
   June 30,  December 31,  June 30,  December 31,  June 30,  December 31,
   2014  2013  2014  2013  2014  2013
  (In thousands)
Originated   
Impaired loans without a valuation allowance:                              
Residential real estate  $864   $—     $864   $—     $—     $—   
Commercial real estate   2,156    —      2,161    —      —      —   
Home equity   96    —      96    —      —      —   
Commercial business   255    —      255    —      —      —   
Total impaired loans without a valuation allowance  $3,371   $—     $3,376   $—     $—     $—   
Impaired loans with a valuation allowance:                              
Residential real estate  $—     $1,867   $—     $1,880   $—     $73 
Commercial real estate   —      1,117    —      1,117    —      56 
Home equity   —      97    —      97    —      4 
Commercial business   776    642    790    642    23    12 
Total impaired loans with a valuation allowance  $776   $3,723   $790   $3,736   $23   $145 
Total originated impaired loans  $4,147   $3,723   $4,166   $3,736   $23   $145 
Acquired                              
Impaired loans without a valuation allowance:                              
Commercial business  $243   $—     $243   $—     $—     $—   
Total impaired loans without a valuation allowance  $243   $—     $243   $—     $—     $—   
Impaired loans with a valuation allowance:                              
Commercial business  $290   $—     $290   $—     $1   $—   
Total impaired loans with a valuation allowance  $290   $—     $290   $—     $1   $—   
Total acquired impaired loans  $533   $—     $533   $—     $1   $—   

  

The following table summarizes the average recorded investment balance of impaired loans and interest income recognized on impaired loans by portfolio segment for the six months ended June 30, 2014 and 2013:

 

   Average Recorded Investment  Interest Income Recognized
Six months ended June 30,  2014  2013  2014  2013
   (In thousands)
Originated                    
Impaired loans without a valuation allowance:                    
Residential real estate  $864   $—     $14   $—   
Commercial real estate   2,164    —      —      —   
Home equity   96    —      1    —   
Commercial business   256    —      5    —   
Total impaired loans without a valuation allowance  $3,380   $—     $20   $—   
Impaired loans with a valuation allowance:                    
Residential real estate  $—     $1,902   $—     $22 
Commercial real estate   —      191    —      6 
Home equity   —      246    —      4 
Commercial business   806    701    23    19 
Total impaired loans with a valuation allowance  $806   $3,040   $23   $51 
Total originated impaired loans  $4,186   $3,040   $43   $51 
Acquired                    
Impaired loans without a valuation allowance:                    
Commercial business  $243   $—     $4   $—   
Total impaired loans without a valuation allowance  $243   $—     $4   $—   
Impaired loans with a valuation allowance:                    
Commercial business  $290   $—     $12   $—   
Total impaired loans with a valuation allowance  $290   $—     $12   $—   
Total acquired impaired loans  $533   $—     $16   $—   

  

  

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Bankwell Financial Group, Inc

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

Troubled debt restructurings (TDRs)

 

Modifications to a loan are considered to be a troubled debt restructuring when one or both of the following conditions is met: 1) the borrower is experiencing financial difficulties and/or 2) the modification constitutes a concession that is not in line with market rates and/or terms. Modified terms are dependent upon the financial position and needs of the individual borrower. Trouble debt restructurings are classified as impaired loans.

 

If a performing loan is restructured into a TDR it remains in performing status. If a nonperforming loan is restructured into a TDR, it continues to be carried in nonaccrual status. Nonaccrual classification may be removed if the borrower demonstrates compliance with the modified terms for a minimum of six months. 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 $3.4 million at June 30, 2014 and $1.6 million at December 31, 2013.

 

The following table presents loans whose terms were modified as TDRs during the periods presented:

 

       Outstanding Recorded Investment 
   Number of Loans   Pre-Modification   Post-Modification 
(Dollars in thousands)  2014   2013   2014   2013   2014   2013 
Three months ended June 30,                        
Commercial real estate   2    -    1,333    -    1,336    - 
Commercial business   3    -    466    -    466    - 
Total   5    -   $1,799   $-   $1,802   $- 
         
       Outstanding Recorded Investment 
   Number of Loans   Pre-Modification   Post-Modification 
(Dollars in thousands)  2014   2013   2014   2013   2014   2013 
Six months ended June 30,                              
Commercial real estate   2    -    1,333    -    1,336    - 
Home equity   -    1    -    97    -    97 
Commercial business   3    -    466    -    466    - 
Total   5    1   $1,799   $97   $1,802   $97 

 

All TDRs at June 30, 2014 and December 31, 2013 were performing in compliance under their modified terms and therefore, were on accrual status.

 

 

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Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

The following table provides information on how loans were modified as a TDR during the three and six months ended June 30, 2014 and 2013.

  

   Three months   Six months 
Periods ended June 30,  2014   2013   2014   2013 
   (In thousands)
Maturity/amortization concession  $631   $97   $631   $97 
Payment concession  $1,171        $1,171      
Total  $1,802   $97   $1,802   $97 

 

There was $1.1 million and no loans modified in a troubled debt restructuring, for which there was a payment default during the three or six months ended June 31, 2014 and 2013, respectively.

 

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Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

4.   Shareholders’ Equity

 

Common stock

 

On May 15, 2014, the Company priced 2,702,703 common shares in its initial public offering (“IPO”) at $18.00 per share, and on May 15, 2014, Bankwell common shares began trading on the Nasdaq Stock Market. The Company issued a total of 2,702,703 common shares in its IPO, which closed on May 20, 2014. The net proceeds from the IPO were approximately $44.7 million, after deducting the underwriting discount of approximately $2.5 million and approximately $1.3 million of expenses.

 

Between 2007 and 2013, four private placements for the sale of common stock were completed for the purpose of capitalizing the Company and allowing for continued growth. The private placement offerings were in addition to the initial and secondary offerings completed in 2002 and 2007, respectively. A total of 3,429,623 shares were issued and net proceeds of $47.8 million were received in connection with these offerings.

 

Preferred stock

 

In 2011, the Company elected to participate in the U.S. Treasury’s Small Business Lending Fund Program (“SBLF”). The SBLF is a $30 billion fund established under the Small Business Jobs Act of 2010 to encourage lending to small businesses by providing Tier 1 capital to qualified community banks with assets of less than $10 billion. The SBLF is intended to expand the ability to lend to small businesses, in order to help stimulate the economy and promote job growth. The transaction resulted in net capital proceeds to the Company of $5.9 million, of which at least 90% was invested in the Banks as Tier 1 Capital.

 

The Series C Preferred stock pays noncumulative dividends. The dividend rate on the Series C Preferred Stock for the initial ten quarterly dividend periods, commencing with the period ended September 30, 2011 and ending with the period ended December 31, 2013, was determined each quarter based on the increase in the Banks’ Qualified Small Business Lending over a baseline amount. The Company has paid dividends at a rate of 1.0% since issuance. For the eleventh quarterly dividend payment through four and one-half years after its issuance, the dividend rate on the Series C Preferred Stock will be fixed at the rate in effect at the end of the ninth quarterly dividend period, which is 1.0%. In the second quarter of 2016, four and one-half years from its issuance, the dividend rate will be fixed at 9.0% per annum.

 

The Series C Preferred Stock has no maturity date and ranks senior to the Company’s common stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the Company. The Series C Preferred Stock is non-voting, other than voting rights on matters that could adversely affect the Series C Preferred Stock, and is redeemable at any time by the Company, subject to the approval of its federal banking regulator. The redemption price is the aggregate liquidation preference of the SBLF Preferred Stock plus accrued but unpaid dividends and pro rata portion of any lending incentive fee. All redemptions must be in an amount at least equal to 25% of the number of originally issued shares of SBLF Preferred Stock, or 100% of the then-outstanding shares if less than 25% of the number of shares originally issued. In connection with the IPO, the U.S. Treasury exercised its piggyback registration rights under the SBLF and the Series C Preferred Stock held by the U.S. Treasury was registered under the Securities Act of 1933, as amended.

 

Warrants

 

The initial and secondary offerings completed in 2002 and 2007 each call for the issuance of Units. Each Unit issued pursuant to these two offerings represented one share of common stock and one non-transferable Warrant. The Warrants were exercisable at any time from and including October 1, 2009 and prior to or on November 30, 2009, unless extended or accelerated by the board of directors in their discretion. The board of directors has extended the exercise period to October 1, 2014 through December 1, 2014. 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 June 30, 2014. 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. A total of 945,789 units were sold generating gross capital of $17.2 million.

 

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Bankwell Financial Group, Inc. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

 

Dividends

 

The Company’s shareholders are entitled to dividends when and if declared by the board of directors, out of funds legally available. Connecticut law prohibits the Company from paying cash dividends except from its net profits, which are defined by state statutes.

 

The payment of dividends is subject to additional restrictions in connection with the SBLF preferred stock.

 

For the six months ended June 30, 2014 and 2013, the Company declared and paid cash dividends on preferred stock of $55 thousand. To date, the Company has not declared or paid dividends on its common stock, nor has it repurchased any of its common stock.

 

5. Comprehensive Income

 

Comprehensive income represents the sum of net income and items of other comprehensive income or loss, including net unrealized gains or losses on securities available for sale and net gains or losses on derivatives accounted for as cash flow hedges. The Company’s total comprehensive income or loss for the three and six months ended June 30, 2014 and 2013 is reported in the Consolidated Statements of Comprehensive Income.

 

The following table presents the changes in accumulated other comprehensive income (loss) by component, net of tax for the three and six months ended June 30, 2014 and 2013:

 

   Net Unrealized Gain   Net Unrealized     
   (Loss) on Available   Loss on Interest     
   for Sale Securities   Rate Swap   Total 
       (In thousands)     
Balance at March 31, 2014   $574   $53   $627 
Other comprehensive income (loss) before reclassifications   115    (119)   (4)
Amounts reclassified from accumulated other
comprehensive income
   -    -    - 
Net other comprehensive income (loss)   115    (119)   (4)
Balance at June 30, 2014  $689   $(66)  $623 

  

   Net Unrealized Gain   Net Unrealized     
   (Loss) on Available   Loss on Interest     
   for Sale Securities   Rate Swap   Total 
       (In thousands)     
Balance at December 31, 2013   $424   $-   $424 
Other comprehensive income (loss) before reclassifications   265    (66)   199 
Amounts reclassified from accumulated other
comprehensive income
   -    -    - 
Net other comprehensive income (loss)   265    (66)   199 
Balance at June 30, 2014  $689   $(66)  $623 

 

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Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

   Net Unrealized Gain 
   (Loss) on Available 
   for Sale Securities 
   (In thousands) 
Balance at March 31, 2013  $1,395 
Other comprehensive loss before reclassifications   (834)
Amounts reclassified from accumulated other comprehensive income   - 
Net other comprehensive loss   (834)
Balance at June 30, 2013  $561 

  

   Net Unrealized Gain 
   (Loss) on Available 
   for Sale Securities 
   (In thousands) 
Balance at December 31, 2012  $1,511 
Other comprehensive loss before reclassifications   (950)
Amounts reclassified from accumulated other comprehensive income   - 
Net other comprehensive loss   (950)
Balance at June 30, 2013  $561 

 

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.

 

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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   Six Months Ended 
   June 30,   June 30, 
   2014   2013   2014   2013 
   (In thousands, except per share data)
             
Net income  $1,227   $1,468   $2,350   $2,480 
Preferred stock dividends   (27)   (27)   (55)   (55)
Dividends and undistributed earnings allocated to participating securities   (27)   (21)   (60)   (37)
Net income available to common shareholders  $1,173   $1,420   $2,235   $2,388 
Weighted average shares outstanding, basic   5,023    3,327    4,396    3,238 
Effect of dilutive equity-based awards   22    75    28    62 
Weighted average shares outstanding, diluted   5,045    3,402    4,424    3,300 
Net earnings per common share:                    
Basic earnings per common share  $0.23   $0.43   $0.51   $0.74 
Diluted earnings per common share   0.23    0.42    0.51    0.72 

 

7.Regulatory Matters

 

The Bank and Company are subject to various regulatory capital requirements administered by federal and state 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 consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

Quantitative measures established by regulation to ensure capital adequacy require 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. Management believes, as of June 30, 2014, the Bank and Company meet all capital adequacy requirements to which they are subject. As of June 30, 2014, the Bank was well capitalized under the regulatory framework for prompt corrective action, as shown in the following schedules. There are no conditions or events since then that management believes have changed this category.

 

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Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

The capital amounts and ratios for the Bank and Company at June 30, 2014 and December 31, 2013, were as follows:

 

           To be Well 
           Capitalized Under 
       For Capital   Prompt Corrective 
   Actual Capital   Adequacy Purposes   Action Provisions 
(Dollars in thousands)  Amount   Ratio   Amount   Ratio   Amount   Ratio 
Bankwell Bank                              
June 30, 2014                              
Total Capital to Risk-Weighted Assets  $110,335    16.48%  $53,558    8.00%  $66,948    10.00%
Tier I Capital to Risk-Weighted Assets   101,958    15.23%   26,779    4.00%   40,169    6.00%
Tier I Capital to Average Assets   101,958    12.49%   32,640    4.00%   40,800    5.00%
Bankwell Financial Group, Inc.                              
June 30, 2014                              
Total Capital to Risk-Weighted Assets  $124,552    18.48%  $53,918    8.00%   N/A    N/A 
Tier I Capital to Risk-Weighted Assets   116,120    17.23%   26,959    4.00%   N/A    N/A 
Tier I Capital to Average Assets   116,120    13.77%   33,738    4.00%   N/A    N/A 
                               
           To be Well 
           Capitalized Under 
       For Capital   Prompt Corrective 
   Actual Capital   Adequacy Purposes   Action Provisions 
(Dollars in thousands)  Amount   Ratio   Amount   Ratio   Amount   Ratio 
Bankwell Bank                              
December 31, 2013                              
Total Capital to Risk-Weighted Assets  $66,674    10.74%  $49,682    8.00%  $62,103    10.00%
Tier I Capital to Risk-Weighted Assets   58,908    9.49%   24,841    4.00%   37,262    6.00%
Tier I Capital to Average Assets   58,908    7.91%   29,772    4.00%   37,215    5.00%
Bankwell Financial Group, Inc.                              
December 31, 2013                              
Total Capital to Risk-Weighted Assets  $76,537    12.32%  $49,683    8.00%   N/A    N/A 
Tier I Capital to Risk-Weighted Assets   68,766    11.07%   24,841    4.00%   N/A    N/A 
Tier I Capital to Average Assets   68,766    9.15%   30,068    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 State of Connecticut Banking Rules and Regulations, regulatory approval is required to pay dividends in excess of the Bank’s earnings retained in the current year plus retained earnings from the previous two years. The Bank is also prohibited from paying dividends that would reduce its capital ratios below minimum regulatory requirements.

 

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Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

8.Stock-Based Compensation

 

Equity award plans

 

The Company has five equity award plans, which are collectively referred to as the “Plan.” The current plan under which any future issuances of equity awards will be made is the 2012 BNC Financial Group, Inc. Stock Plan, or the “2012 Plan,” amended on June 26, 2013. All equity awards made under the 2012 Plan are made by means of an award agreement, which contains the specific terms and conditions of the grant. To date, all equity awards have been in the form of share options or restricted stock. At June 30, 2014, there were 145,125 shares reserved for future issuance under the 2012 Plan.

 

Share Options: The Company accounts for stock options based on the fair value at the date of grant over the vesting period of such awards on a straight line basis. For the six months ended June 30, 2014 and 2013, the Company recorded expense related to options granted under the various plans of approximately $16 thousand and $41 thousand, respectively.

 

There were no options granted during the six months ended June 30, 2014.

 

A summary of the status of outstanding stock options as of and for the six months ended June 30, 2014 is presented below:

 

   Six Months Ended 
   June 30, 2014 
       Weighted 
   Number   Average 
   of   Exercise 
   Shares   Price 
         
Options outstanding at beginning of period   208,568   $16.67 
Granted   -    - 
Forfeited   (4,270)   18.32 
Exercised   (20,305)   10.17 
Expired   (480)   10.00 
Options outstanding at end of period   183,513    17.37 
Options exercisable at end of period   172,152    17.51 
Weighted-average fair value of options granted during the period        N/A 

 

Intrinsic value is the amount by which the fair value of the underlying stock exceeds the exercise price of an option on the exercise date. The total intrinsic value of share options exercised during the six months ended June 30, 2014 was $214 thousand.

 

Restricted Stock: Restricted stock provides grantees with rights to shares of common stock upon completion of a service period and certain performance goals. Shares of unvested restricted stock are considered participating securities. Restricted stock awards generally vest over one to five years.

 

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Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

The following table presents the activity for restricted stock for the six months ended June 30, 2014:

 

   Six Months Ended 
   June 30, 2014 
       Weighted 
   Number   Average 
   of   Grant Date 
   Shares   Fair Value 
         
Unvested at beginning of period   122,140   $15.98 
Granted   -    - 
Vested   (4,900)   14.80 
Forfeited   (5,916)   16.57 
Unvested at end of period   111,324    16.00 

 

The Company’s restricted stock expense for the six months ended June 30, 2014 and 2013 was $264 thousand and $95 thousand, respectively.

 

9.derivative instruments

 

The Company entered into a derivative transaction in February, 2014. Information about derivative instruments at June 30, 2014 was as follows:

 

   Notional              Fair 
(Dollars in thousands)  Amount   Maturity  Received   Paid   Value 
                    
Cash flow hedge:                       
Interest rate swap on FHLB advance  $25,000   4.7 years  0.23%  1.62%  $(108)

 

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.

 

The Bank’s cash flow hedge positions are all forward starting interest rate swap transactions. As of February 6, 2014 the Bank entered into the following forward starting interest rate swap transactions:

 

   Notional   Effective Date of  Duration of   
(Dollars in thousands)  Amount   Hedged Borrowing  Borrowing  Counterparty
              
Type of borrowing:              
FHLB 90-day advance  $25,000   April 1, 2014  4.7 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.

 

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Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

Changes in the consolidated statements of comprehensive income related to interest rate derivatives designated as hedges of cash flows were as follows for the three and six months ended June 30, 2014:

 

   Three Months Ended   Six Months Ended 
(In thousands)  June 30, 2014   June 30, 2014 
         
Interest rate swap on FHLB advance:          
Unrealized loss recognized in accumulated other comprehensive income  $(195)  $(108)
Income tax benefit on items recognized in accumulated other comprehensive income   76    42 
Other comprehensive loss  $(119)  $(66)
Interest expense recognized on hedged FHLB advance  $88   $88 

 

10.Fair Value of Financial Instruments

 

GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the statements of condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparisons to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.

 

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at either June 30, 2014 or December 31, 2013. 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.

 

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Bankwell Financial Group, Inc. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

The carrying values, fair values and placement in the fair value hierarchy of the Company’s financial instruments at June 30, 2014 and December 31, 2013 were as follows:

 

   June 30, 2014 
   Carrying   Fair             
   Value   Value   Level 1   Level 2   Level 3 
   (In thousands) 
Financial Assets:                         
Cash and due from banks  $130,535   $130,535   $130,535   $-   $- 
Available for sale securities   49,114    49,114    -    49,114    - 
Held to maturity securities   13,742    13,790    -    13,790    - 
Loans held for sale   325    325    -    325    - 
Loans receivable, net   671,500    675,154    -    -    675,154 
Accrued interest receivable   2,464    2,464    -    -    2,464 
FHLB stock   4,834    4,834    -    -    4,834 
                          
Financial Liabilities:                         
Demand deposits   146,596    146,596    -    -    146,596 
NOW and money market   233,659    233,659    -    -    233,659 
Savings   89,914    89,914    -    -    89,914 
Time deposits   260,017    261,417    -    -    261,417 
Advances from the FHLB   47,000    46,949    -    -    46,949 
Derivative liability   108    108    -    108    - 
                          
   December 31, 2013 
   Carrying   Fair             
   Value   Value   Level 1   Level 2   Level 3 
   (In thousands) 
Financial Assets:                         
Cash and due from banks  $82,013   $82,013   $82,013   $-   $- 
Available for sale securities   28,597    28,597    -    28,597    - 
Held to maturity securities   13,816    13,815    -    13,815    - 
Loans held for sale   100    100    -    100    - 
Loans receivable, net   621,830    623,876    -    -    623,876 
Accrued interest receivable   2,360    2,360    -    -    2,360 
FHLB stock   4,834    4,834    -    -    4,834 
                          
Financial Liabilities:                         
Demand deposits   118,618    118,618    -    -    118,618 
NOW and money market   238,231    238,231    -    -    238,231 
Savings   107,692    107,692    -    -    107,692 
Time deposits   197,004    197,762    -    -    197,762 
Advances from the FHLB   44,000    43,902    -    -    43,902 

 

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.

 

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Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

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 swap 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.

 

Advances from the FHLB: The fair value of the advances is estimated using a discounted cash flow calculation that applies current FHLB interest rates for advances of similar maturity to a schedule of maturities of such advances.

 

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.

 

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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 June 30, 2014 and December 31, 2013, 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 six months ended June 30, 2014 and the year ended December 31, 2013.

 

   Fair Value 
   Level 1   Level 2   Level 3 
   (In thousands) 
June 30, 2014:               
Available-for-sale investment securities:               
U.S. Government and agency obligations  $-   $19,313   $- 
State agency and municipal obligations   -    15,119    - 
Corporate bonds   -    13,667    - 
Mortgage backed securities   -    1,015    - 
Derivative liability   -    (108)   - 
                
December 31, 2013:               
Available-for-sale investment securities:               
U.S. Government and agency obligations  $-   $5,688   $- 
State agency and municipal obligations   -    12,132    - 
Corporate bonds   -    9,566    - 
Mortgage backed securities   -    1,211    - 

 

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 liability: The Company’s derivative liability is an interest rate swap, initiated in February 2014 as part of management’s strategy to manage interest rate risk. The valuation of the Company’s interest rate swap 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.

 

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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 June 30, 2014 and December 31, 2013, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

 

   Fair Value 
   Level 1   Level 2   Level 3 
   (In thousands) 
June 30, 2014:               
Impaired loans  $-   $-   $4,680 
Foreclosed real estate   -    -    829 
                
December 31, 2013:               
Impaired loans  $-   $-   $3,723 
Foreclosed real estate   -    -    829 

 

The following table presents information about quantitative inputs and assumptions for Level 3 financial instruments carried at fair value on a nonrecurring basis at June 30, 2014 and December 31, 2013:

 

   Fair   Valuation  Unobservable  Range 
(Dollars in thousands)  Value   Methodology  Input  (Weighted Average) 
               
June 30, 2014:                
Impaired loans  $4,680   Appraisals  Discount for dated appraisals   8.0% - 28.0% 
        Discounted cash flows  Discount rate   3.25% - 7.00% 
Foreclosed real estate  $829   Appraisals  Discount for dated appraisals   29.4% to 46.0% 
                 
December 31, 2013:                
Impaired loans  $3,723   Appraisals  Discount for dated appraisals   3.5% to 5.0% 
        Discounted cash flows  Discount rate   1.9% 
Foreclosed real estate  $829   Appraisals  Discount for dated appraisals   29.4% to 46.0% 

 

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.

 

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.

 

 

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Bankwell Financial Group, Inc. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

12.Mergers and Acquisitions

 

On November 5, 2013, the Company acquired all of the outstanding common shares of The Wilton Bank (“Wilton”). This business combination expanded the Bank’s presence in Fairfield County and enhanced opportunities for businesses, customer relationships, employees and the communities served by the Bank.

 

On the acquisition date, Wilton had 372,985 outstanding common shares, net of 108,260 shares of treasury stock, and shareholders’ equity of $6.3 million. Wilton shareholders received $13.50 per share resulting in a consideration value of $5.0 million.

 

The assets and liabilities in the Wilton 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 Wilton’s assets acquired and liabilities assumed are summarized in the following tables:

 

Consideration paid: (In thousands)  Amount 
Cash consideration paid to Wilton shareholders  $5,035 

 

Recognized amounts of identifiable assets acquired      Fair Value   As Recorded 
and (liabilities) assumed: (In thousands)  As Acquired   Adjustments   at Acquisition 
Cash  $35,919   $-   $35,919 
Held to maturity investments securities   1,022    -    1,022 
Loans   27,097    (2,008)a    25,089 
Premises and equipment   4,303    -    4,303 
Other real estate owned   1,895    (450)b   1,445 
Core deposit intangibles   -    499c   499 
Deferred tax assets, net   -    1,997d   1,997 
Other assets   587    -    587 
Deposits   (64,145)   (12)e   (64,157)
Other liabilities   (336)   -    (336)
Total identifiable net assets  $6,342   $26   $6,368 
                
Gain on purchase            $(1,333)

 

Explanation of fair value adjustments:

 

a)The adjustment represents the write down 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.

 

b)The adjustment represents the write down of the book value of foreclosed real estate to their estimated fair value based on current appraisals.

 

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 9.3 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 0.11% as they bore slightly higher rates than the prevailing market.

 

Except for collateral dependent loans with deteriorated credit quality, the fair values for loans acquired from Wilton 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.

 

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Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

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 Wilton’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 November 5, 2013 was as follows:

 

   November 5, 
(In thousands)  2013 
     
Contractually required principal and interest at acquisition  $14,528 
Contractual cash flows not expected to be collected (nonaccretable discount)   (1,412)
Expected cash flows at acquisition   13,116 
Interest component of expected cash flows (accretable discount)   (1,513)
Fair value of acquired loans  $11,603 

 

Pending

 

On March 31, 2014, the Company entered into a merger agreement with Quinnipiac Bank & Trust Company (“Quinnipiac”), located in New Haven County, Connecticut. Quinnipiac has one branch located in Hamden, Connecticut, and a second branch in the neighboring town of North Haven. At June 30, 2014, Quinnipiac had approximately $115 million in assets, $98 million in deposits and loans of $90 million.

 

Total consideration for the acquisition is expected to be comprised of our common stock (75%) and cash (25%). The total consideration to be paid to Quinnipiac shareholders, based on the closing price of a share of our common stock on the OTC Bulletin Board, or OTCBB, on March 31, 2014, is approximately $15 million. Pursuant to the merger agreement, each outstanding share of Quinnipiac will be converted at the election of the holder into the right to receive 0.56 shares of our common stock, or $12.00 in cash, subject to pro rata adjustments to meet the proportion of stock and cash consideration described above. Outstanding options to purchase Quinnipiac shares, totaling 109,000 as of March 31, 2014, will be exchanged for options in our common stock adjusted for the 0.56 fixed exchange ratio. The exercise price per share of our common stock under the new option shall be equal to the exercise price per share of Quinnipiac common stock subject to the Quinnipiac stock option divided by the 0.56 fixed exchange ratio. Outstanding warrants held by founders of Quinnipiac, totaling 122,500 as of June 30, 2014, will be automatically converted into a warrant to purchase 0.56 shares of our common stock for $17.86. Upon consummation of the transaction, Quinnipiac will be merged into Bankwell Bank.

 

The transaction is expected to close in the fourth quarter of 2014, subject to the requisite approval of the shareholders of Quinnipiac, required regulatory approvals, and satisfaction of other customary closing conditions. Upon effectiveness of the merger, change in control payments totaling $631,466 are expected to be paid.

 

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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 Company’s Registration Statement on Form S-1 filed for the year ended December 31, 2013 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 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 and with general practices within the financial services industry. 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 allowance for loan losses, fair values of securities and deferred taxes are particularly critical and susceptible to significant near-term change. These accounting estimates are discussed further in the Company’s Registration Statement on Form S-1 filed for the year ended December 31, 2013 in the section “Critical Accounting Policies and Estimates” under Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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;

 

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·Strategic acquisitions;
·Utilization of efficient and scalable infrastructure; and
·Disciplined focus on risk management.

 

During 2014 we entered into a merger agreement and completed an initial public offering, or IPO, for the sale of 2,702,703 shares of our common stock.

 

On March 31, 2014, we entered into a merger agreement with Quinnipiac Bank & Trust Company, or Quinnipiac, located in New Haven County, Connecticut. Quinnipiac has one branch located in Hamden, Connecticut and a second branch located in the neighboring town of North Haven, Connecticut. At June 30, 2014, Quinnipiac had approximately $115 million in assets, $98 million in deposits and loans of $90 million. Upon consummation of the transaction, Quinnipiac will be merged into Bankwell Bank. The transaction is expected to close in the fourth quarter of 2014, subject to the requisite approval of the shareholders of Quinnipiac, required regulatory approvals, and satisfaction of other customary closing conditions.

 

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 or working capital needs, 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.

 

Earnings Overview

 

Net income available to common shareholders was $1.2 million, or $0.23 per diluted share, and $1.4 million, or $0.42 per diluted share, respectively, for the three months ended June 30, 2014 and 2013. Returns on average equity and average assets for the three months ended June 30, 2014 were 5.46% and 0.58%, respectively, compared to 9.71% and 0.90%, respectively, for the same period in 2013.

 

Net income available to common shareholders was $2.2 million, or $0.51 per diluted share, and $2.4 million, or $0.72 per diluted share, respectively, for the six months ended June 30, 2014 and 2013. Returns on average equity and average assets for the six months ended June 30, 2014 were 5.93% and 0.59%, respectively, compared to 8.34% and 0.80%, respectively, for the same period in 2013.

 

For the three months ended June 30, 2014, we had net interest income of $7.1 million, an increase of $0.9 million, or 14%, over the three months ended June 30, 2013. Our net interest margin (fully taxable equivalent basis) for the three months ended June 30, 2014 and 2013 was 3.68% and 3.97%, respectively. We experienced a decline in our non-interest income, which totaled $682 thousand for the three months ended June 30, 2014 representing 9% of our total revenue, down from $1.5 million, or 20% of total revenue, for the three months ended June 30, 2013. The decline in our non-interest income was driven by a reduction of gains and fees from sales of loans of $544 thousand and a net gain on sale of available for sale securities recognized in 2013 of $648 thousand.

 

For the six months ended June 30, 2014, we had net interest income of $14.3 million, an increase of $2.0 million, or 15.9%, over the six months ended June 30, 2013. Our net interest margin (fully taxable equivalent basis) for the six months ended June 30, 2014 and 2013 was 3.82% and 4.03%, respectively. We experienced a decline in our non-interest income, which totaled $1.5 million for the six months ended June 30, 2014 representing 9.2% of our total revenue, down from $1.8 million, or 13% of total revenue, for the six months ended June 30, 2013. The decline in our non-interest income was driven by a reduction of gains and fees from sales of loans of $123 thousand and a net gain on sale of available for sale securities recognized in 2013 of $648 thousand.

 

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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 and, for loans, only include performing loans. Average balances of non-performing loans for the six months ended June 30, 2014 and 2013 totaling $1.1 million and $1.0 million, respectively, have been excluded. Interest income on loans includes the effect of deferred loan fees and costs accounted for as yield adjustments, but does not include interest on loans for which we have ceased to accrue interest. 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 June 30, 2014 and 2013 was $7.3 million and $6.3 million, respectively. FTE net interest income for the six months ended June 30, 2014 and 2013 was $14.5 million and $12.5 million, respectively. Our net interest margin declined 29 basis points to 3.68% for the three months ended June 30, 2014, compared to the same period in 2013 due primarily to the effects of the low interest rate environment and an increase in cash and fed funds sold as a result of the capital raised from the IPO. Our net interest margin declined 21 basis points to 3.82% for the six months ended June 30, 2014, compared to the same period in 2013 due primarily to the effects of the low interest rate environment and an increase in cash and fed funds sold as a result of the capital raised from the IPO. While we have experienced significant growth in average loan balances, in the current low interest rate environment, market yields on new loan originations are below the average yield of our existing loan portfolio. Due to the combined effect of new loan growth and the runoff of higher yielding loan balances, we anticipate that interest rates on total earning assets will continue to decline. The impact of this trend is likely to exceed the benefit to be realized in reduced funding costs, resulting in modestly lower net interest margin results in the near term.

 

FTE basis interest income for the three months ended June 30, 2014 increased by $1.2 million, or 17%, to $8.2 million, compared to FTE basis interest income for the three months ended June 30, 2013 due primarily to loan growth in our commercial real estate and commercial business portfolios. Average interest-earning assets were $789.0 million for the three months ended June 30, 2014, up by $151.0 million from the same period in 2013. The average balance of total loans increased $81.1 million, or 14%, contributing $1.0 million to the increase in interest income. Commercial real estate and commercial business loan average balances grew by $26.3 million and $35.4 million, respectively.

 

FTE basis interest income for the six months ended June 30, 2014 increased by $2.4 million, or 17%, to $16.1 million, compared to FTE basis interest income for the six months ended June 30, 2013 due primarily to loan growth in our commercial real estate and commercial business portfolios. Average interest-earning assets were $760.1 million for the six months ended June 30, 2014, up by $143.0 million from the same period in 2013. The average balance of total loans increased $97.7 million, or 18%, contributing $2.1 million to the increase in interest income. Commercial real estate and commercial business loan average balances grew by $35.5 million and $35.9 million, respectively.

 

Interest expense for the three months ended June 30, 2014, increased by $245 thousand, or 38%, compared to interest expense for the three months ended June 30, 2013 due to a $102.1 million increase in the average balances of interest-bearing liabilities.

 

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Average balances of total funding liabilities for the three months ended June 30, 2014, increased by $143.4 million, or 25%, from the same period in 2013, primarily due to higher average balances in money market and time accounts and increased rates on time deposits.

 

Interest expense for the six months ended June 30, 2014, increased by $367 thousand, or 30%, compared to interest expense for the six months ended June 30, 2013 due to a $102.8 million increase in the average balances of interest-bearing liabilities. Average balances of total funding liabilities for the six months ended June 30, 2014, increased by $145.1 million, or 26%, from the same period in 2013, primarily due to higher average balances in money market and time accounts and increased rates on time deposits.

 

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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 the average balances and weighted average rates paid on our funding liabilities for the three and six months ended June 30, 2014 and 2013. Such yields and costs are derived by dividing annualized income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the periods presented.

 

   Three Months Ended June 30, 
   2014   2013 
   Average       Yield /   Average       Yield / 
(Dollars in thousands)  Balance   Interest   Rate   Balance   Interest   Rate 
Assets:                              
Cash and Fed funds sold  $78,646   $49    0.25%  $22,693   $11    0.19%
Securities (1)   51,755    529    4.05    38,219    392    4.11 
Loans: (2)                              
Commercial real estate   335,263    4,086    4.82    308,972    3,815    4.89 
Residential real estate   160,899    1,467    3.61    152,353    1,380    3.63 
Construction (3)   42,377    515    4.80    36,924    448    4.80 
Commercial business   98,113    1,239    4.99    62,745    819    5.16 
Home equity   13,124    122    3.74    10,828    102    3.76 
Consumer   714    15    8.17    747    9    5.05 
Acquired Loan Portfolio Non accrual loans (net of mark)   3,220    116    14.49                
Total loans   653,710    7,560    4.57    572,569    6,573    4.54