UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
   
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended September 30, 2014
   
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from _________to________
 
Commission File Number: 001-36448
 
Bankwell Financial Group, Inc.
(Exact Name of Registrant as specified in its Charter)
   
Connecticut
20-8251355
(State or other jurisdiction of
(I.R.S. Employer
Incorporation or organization)
Identification No.)
   
220 Elm Street
New Canaan, Connecticut 06840
(203) 652-0166
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ  Yes  o 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  o 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  o
 
Accelerated filer  o
Non-accelerated filer þ (Do not check if a smaller reporting company)
Smaller reporting company  o
 
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes  þ No
 
     As of October 31, 2014, there were 7,068,382 shares of the registrant’s common stock outstanding.
 


 
 

 

 
Bankwell Financial Group, Inc.
Form 10-Q
 
Table of Contents
     
   
 
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Certifications
 
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PART 1 – FINANCIAL INFORMATION
Item 1. Financial Statements
Bankwell Financial Group, Inc.
Consolidated Balance Sheets - (Unaudited)
(Dollars in thousands, except share data)
             
   
September 30,
   
December 31,
 
   
2014
   
2013
 
             
ASSETS
           
Cash and due from banks
  $ 35,566     $ 82,013  
Held to maturity investment securities, at amortized cost (Note 2)
    11,502       13,816  
Available for sale investment securities, at fair value (Note 2)
    67,537       28,597  
Loans held for sale
    -       100  
Loans receivable (net of allowance for loan losses of $9,552 at September 30, 2014 and $8,382 at December 31, 2013) (Note 3)
    730,148       621,830  
Foreclosed real estate
    829       829  
Accrued interest receivable
    2,670       2,360  
Federal Home Loan Bank stock, at cost
    4,834       4,834  
Premises and equipment, net
    7,787       7,060  
Bank-owned life insurance
    22,837       10,031  
Other intangible assets
    401       481  
Deferred income taxes, net
    5,804       5,845  
Other assets
    5,600       1,822  
Total assets
  $ 895,515     $ 779,618  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Liabilities
               
Deposits
               
Noninterest bearing deposits
  $ 151,146     $ 118,618  
Interest bearing deposits
    544,117       542,927  
Total deposits
    695,263       661,545  
                 
Advances from the Federal Home Loan Bank
    77,000       44,000  
Accrued expenses and other liabilities
    4,755       4,588  
Total liabilities
    777,018       710,133  
                 
Shareholders’ equity (Notes 4, 5 and 7)
               
Preferred stock, senior noncumulative perpetual, Series C, no par; 10,980 shares issued at September 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, 6,559,995 and 3,876,393 shares issued at September 30, 2014 and December 31, 2013, respectively
    97,180       52,105  
Retained earnings
    9,735       5,976  
Accumulated other comprehensive income
    602       424  
Total shareholders’ equity
    118,497       69,485  
                 
Total liabilities and shareholders’ equity
  $ 895,515     $ 779,618  
 
See accompanying notes to consolidated financial statements (unaudited)
 
3
 

 

 
Bankwell Financial Group, Inc.
Consolidated Statements of Income – (Unaudited)
(Dollars in thousands, except per share amounts)

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Interest and dividend income
                       
Interest and fees on loans
  $ 8,054     $ 6,748     $ 23,040     $ 19,619  
Interest and dividends on securities
    569       355       1,417       1,040  
Interest on cash and cash equivalents
    45       18       116       39  
Total interest income
    8,668       7,121       24,573       20,698  
                                 
Interest expense
                               
Interest expense on deposits
    905       600       2,257       1,553  
Interest on Borrowings
    168       127       427       417  
Total interest expense
    1,073       727       2,684       1,970  
                                 
Net interest income
    7,595       6,394       21,889       18,728  
                                 
Provision for loan losses
    566       47       847       489  
                                 
Net interest income after provision for loan losses
    7,029       6,347       21,042       18,239  
                                 
Noninterest income
                               
Gains and fees from sales of loans
    366       972       1,008       1,737  
Service charges and fees
    153       100       420       297  
Bank owned life insurance
    135       -       305       -  
Net gain on sale of available for sale securities
    -       -       -       648  
Gain (loss) on sale of foreclosed real estate, net
    -       (16 )     -       49  
Other
    103       27       475       141  
Total noninterest income
    757       1,083       2,208       2,872  
                                 
Noninterest expense
                               
Salaries and employee benefits
    2,786       2,894       9,412       8,146  
Occupancy and equipment
    1,066       836       3,162       2,410  
Professional services
    394       422       1,035       1,212  
Data processing
    314       280       949       787  
Director fees
    177       142       460       426  
Merger and acquisition related expenses
    145       -       408       64  
Marketing
    135       378       463       776  
FDIC insurance
    120       36       345       267  
Amortization of intangibles
    27       -       80       -  
Foreclosed real estate
    9       1       21       4  
Other
    357       342       1,134       950  
Total noninterest expense
    5,530       5,331       17,469       15,042  
                                 
Income before income tax expense
    2,256       2,099       5,781       6,069  
                                 
Income tax expense
    765       780       1,940       2,270  
                                 
Net income
  $ 1,491     $ 1,319     $ 3,841     $ 3,799  
                                 
Net income attributable to common shareholders
  $ 1,441     $ 1,271     $ 3,677     $ 3,660  
                                 
Earnings per common share - basic
  $ 0.22     $ 0.38     $ 0.72     $ 1.12  
Earnings per common share - diluted
    0.22       0.37       0.72       1.10  
 
See accompanying notes to consolidated financial statements (unaudited)
 
4
 

 

 
Bankwell Financial Group, Inc.
Consolidated Statements of Comprehensive Income  – (Unaudited)
(In thousands)

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
                         
Net income
  $ 1,491     $ 1,319     $ 3,841     $ 3,799  
                                 
Other comprehensive income (loss):
                               
Unrealized gains (losses) on securities:
                               
Unrealized holding gains (losses) on available for sale securities
    (253 )     (13 )     180       (920 )
Reclassification adjustment for (gain) loss realized in net income
    -       -       -       (648 )
Net change in unrealized gain (loss)
    (253 )     (13 )     180       (1,568 )
Tax effect - (expense) benefit
    99       5       (70 )     610  
Unrealized gains (losses) on securities, net of tax
    (154 )     (8 )     110       (958 )
Unrealized gains (losses) on interest rate swap:
                               
Unrealized gains (losses) on interest rate swaps designated as cash flow hedge
    218       -       111       -  
Tax effect - (expense) benefit
    (85 )     -       (43 )     -  
Unrealized gains (losses) on interest rate swap
    133       -       68       -  
Total other comprehensive income (loss)
    (21 )     (8 )     178       (958 )
Comprehensive income
  $ 1,470     $ 1,311     $ 4,019     $ 2,841  
 
See accompanying notes to consolidated financial statements (unaudited)
 
5
 

 

 
Bankwell Financial Group, Inc.
Consolidated Statements of Shareholders’ Equity  – (Unaudited)
(In thousands, except share data)
                               
   
Preferred
Stock
   
Common
Stock
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
 
                               
Balance at December 31, 2012
  $ 10,980     $ 38,117     $ 926     $ 1,511     $ 51,534  
Net income
    -       -       3,799       -       3,799  
Other comprehensive loss, net of tax
    -       -       -       (958 )     (958 )
Preferred stock dividends
    -       -       (84 )     -       (84 )
Stock based compensation expense
    -       205       -       -       205  
Capital from exercise of stock options
    -       471       -       -       471  
Capital from private placement
    -       13,178       -       -       13,178  
                                         
Balance at September 30, 2013
  $ 10,980     $ 51,971     $ 4,641     $ 553     $ 68,145  
                                         
   
Preferred
Stock
   
Common
Stock
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income
   
Total
 
                               
Balance at December 31, 2013
  $ 10,980     $ 52,105     $ 5,976     $ 424     $ 69,485  
Net income
    -       -       3,841       -       3,841  
Other comprehensive income, net of tax
    -       -       -       178       178  
Preferred stock dividends
    -       -       (82 )     -       (82 )
Stock based compensation expense
    -       164       -       -       164  
Capital from exercise of stock options
    -       207       -       -       207  
Issuance of 2,702,703 shares, net of expenses
    -       44,704       -       -       44,704  
                                         
Balance at September 30, 2014
  $ 10,980     $ 97,180     $ 9,735     $ 602     $ 118,497  
 
See accompanying notes to consolidated financial statements (unaudited)
 
6
 

 

 
Bankwell Financial Group, Inc.
Consolidated Statements of Cash Flows – (Unaudited)
(In thousands)
             
   
Nine Months Ended
September 30,
 
   
2014
   
2013
 
Cash flows from operating activities
           
Net income
  $ 3,841     $ 3,799  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Net amortization of premiums and discounts on investment securities
    82       151  
Provision for loan losses
    847       489  
Benefit for deferred taxes
    (213 )     (43 )
Net gain on sales of available for sale securities
    -       (648 )
Depreciation and amortization
    835       440  
Increase in cash surrender value of bank-owned life insurance
    (305 )     -  
Loans originated for sale
    (22,465 )     (59,580 )
Proceeds from sales of loans
    23,572       61,316  
Net gain on sales of loans
    (1,008 )     (1,737 )
Equity-based compensation
    164       205  
Net accretion of purchase accounting adjustments
    (352 )     -  
Gain on sale of foreclosed real estate
    -       (49 )
Net change in:
               
Deferred loan fees
    583       297  
Accrued interest receivable
    (311 )     (55 )
Other assets
    (3,524 )     (71 )
Accrued expenses and other liabilities
    167       (1,390 )
Net cash provided by operating activities
    1,913       3,124  
                 
Cash flows from investing activities
               
Proceeds from principal repayments on available for sale securities
    3,307       638  
Proceeds from principal repayments on held to maturity securities
    2,308       145  
Net proceeds from sales and calls of available for sale securities
    1,620       10,194  
Purchases of held to maturity securities
    -       (7,700 )
Purchase of available for sale securities
    (43,763 )     -  
Purchase of bank-owned life insurance
    (12,500 )     -  
Net increase in loans
    (109,323 )     (54,334 )
Purchases of premises and equipment
    (1,562 )     (450 )
Purchase of Federal Home Loan Bank stock
    -       (134 )
Proceeds from sale of foreclosed real estate
    -       1,011  
Net cash used by investing activities
    (159,913 )     (50,630 )
 
See accompanying notes to consolidated financial statements (unaudited)
 
7
 

 

 
Consolidated Statements of Cash Flows- (Continued)
(In thousands)
   
Nine Months Ended
 
   
September 30,
 
   
2014
   
2013
 
Cash flows from financing activities
           
Net change in time certificates of deposit
  $ 38,569     $ 68,400  
Net change in other deposits
    (4,845 )     13,643  
Net proceeds (repayments) from short term FHLB advances
    40,000       (13,000 )
Net proceeds (repayments) from long term FHLB advances
    (7,000 )     (13,000 )
Proceeds from issuance of common stock
    44,704       13,178  
Proceeds from exercise of options
    207       471  
Dividends paid on preferred stock
    (82 )     (84 )
Net cash provided by financing activities
    111,553       69,608  
Net increase (decrease) in cash and cash equivalents
    (46,447 )     22,102  
Cash and cash equivalents:
               
Beginning of year
    82,013       28,927  
End of period
  $ 35,566     $ 51,029  
                 
Supplemental disclosures of cash flows information:
               
Cash paid for:
               
Interest
  $ 2,742     $ 1,872  
Income taxes
    450       2,042  
Noncash investing and financing activities
    -        -   
 
See accompanying notes to consolidated financial statements (unaudited)
 
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Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
   
1.
Nature of Operations and Summary of Significant Accounting Policies
 
Bankwell Financial Group, Inc. (the “Company” or “Bankwell”) is a bank holding company headquartered in New Canaan, Connecticut. The Company offers a broad range of financial services through its banking subsidiary, Bankwell Bank, (the “Bank”).  The Bank was originally chartered as two separate banks, The Bank of New Canaan (“BNC”) and The Bank of Fairfield (“TBF”). In September 2013, BNC and TBF were merged and rebranded as “Bankwell Bank.”  In November 2013, the Bank acquired The Wilton Bank (“Wilton”), which added one branch and approximately $25.1 million in loans and $64.2 million in deposits.  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 first quarter of 2015. In addition, The Company acquired Quinnipiac Bank and Trust Company on October 1, 2014. The acquisition expanded the Company’s branch locations to New Haven County, Connecticut, adding a branch in Hamden Connecticut and North Haven, Connecticut. See note 13, Subsequent Events for further information about the merger with Quinnipiac Bank and Trust Company.
 
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.
 
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Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
 
Derivative Instruments
 
The Company enters into interest rate swap agreements as part of the Company’s interest rate risk management strategy. Management applies the hedge accounting provisions of Accounting Standards Codification (“ASC”) Topic 815, and formally documents at inception all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking the various hedges. Additionally, the Company uses dollar offset or regression analysis at the hedge’s inception and for each reporting period thereafter, to assess whether the derivative used in its hedging transaction is expected to be and has been highly effective in offsetting changes in the fair value or cash flows of the hedged item. The Company discontinues hedge accounting when it is determined that a derivative is not expected to be or has ceased to be highly effective as a hedge, and then reflects changes in fair value of the derivative in earnings after termination of the hedge relationship.
 
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.
 
ASU 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 (a consensus of the FASB Emerging Issues Task Force).
 
As a result of applying this ASU, an unrecognized tax benefit should be presented as a reduction of a deferred tax asset for a net operating loss (“NOL”) or other tax credit carryforward when settlement in this manner is available under the tax law. The assessment of whether settlement is available under the tax law would be based on facts and circumstances as of the balance sheet reporting date and would not consider future events (e.g., upcoming expiration of related NOL carryforwards). This classification should not affect an entity’s analysis of the realization of its deferred tax assets. Gross presentation in the roll forward of unrecognized tax positions in the notes to the financial statements will still be required. For the Company, the update was effective prospectively for annual reporting periods beginning on or after January 1, 2014, and interim periods within those annual periods. Retrospective application is permitted. Adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

10
 

 

 
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
 
ASU No. 2014-04 - Troubled Debt Restructuring by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force).
 
The amendments in this update apply to all creditors who obtain physical possession (resulting from an in substance repossession or foreclosure) of residential real estate property collateralizing a consumer mortgage loan in satisfaction of a receivable.  The objective of the amendments in this update is to reduce diversity by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to requirements of the applicable jurisdiction.  The amendments in this update are effective for the Company for annual reporting periods beginning on or after January 1, 2015, and interim periods within those annual periods. Adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.
 
ASU No. 2014-09 - Revenue from Contracts with Customers (Topic 660).
 
This update requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
 
ASU No. 2014-12 - Compensation-Stock Compensation (Topic 718) - Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period a consensus of the FASB Emerging Issues Task Force.
 
The amendments in this update require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The amendments in this update are effective for the Company for annual periods and interim periods beginning on or after January 1, 2016. Earlier adoption is permitted. Adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.
 
11
 

 

 
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
 
ASU No. 2014-14 - Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure a Consensus of the FASB Emerging Issues Task Force.
 
The objective of this update is to reduce the diversity in classification of government-guaranteed mortgage loans, including FHA or VA guaranteed loans, upon foreclosure. The amendments in this update are effective for the Company for annual periods and interim periods beginning on or after January 1, 2016. Earlier adoption is permitted. Adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.
 
12
 

 

 
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
   
2.
Investment Securities
 
The amortized cost, gross unrealized gains and losses and fair values of available for sale and held to maturity securities at September 30, 2014 were as follows:
       
   
September 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
  $ 4,994     $ 5     $ (59 )   $ 4,940  
Due from five through ten years
    20,995       15       (174 )     20,836  
Due after ten years
    7,961       2       (4 )     7,959  
      33,950       22       (237 )     33,735  
State agency and municipal obligations
                               
Due from five through ten years
    9,314       248       (63 )     9,499  
Due after ten years
    7,244       562       (4 )     7,802  
      16,558       810       (67 )     17,301  
Corporate bonds
                               
Due in less than one year
    1,000       6       -       1,006  
Due from one through five years
    8,206       338       (9 )     8,535  
Due from five through ten years
    6,126       -       (70 )     6,056  
      15,332       344       (79 )     15,597  
                                 
Government-sponsored mortgage-backed securities
    822       82       -       904  
                                 
Total available for sale securities
  $ 66,662     $ 1,258     $ (383 )   $ 67,537  
                                 
Held to maturity securities:
                               
U.S. Government and agency obligations
Due from one through five years
  $ 1,013     $ 1     $ -     $ 1,014  
State agency and municipal obligations
Due after ten years
    9,210       -       -       9,210  
Corporate bonds
Due from five through ten years
    1,000       2       -       1,002  
Government-sponsored mortgage-backed securities
    279       34       -       313  
                                 
Total held to maturity securities
  $ 11,502     $ 37     $ -     $ 11,539  
 
13
 

 

 
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
 
The amortized cost, gross unrealized gains and losses and fair values of available for sale and held to maturity securities at December 31, 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 nine months ended September 30, 2014. The realized gain on the sale of investment securities totaled $0 and $648 thousand for the three and nine months ended September 30, 2013, respectively.
 
At September 30, 2014 and December 31, 2013, securities with approximate fair values of $6.8 million and $6.2 million, respectively, were pledged as collateral for public deposits.
 
14
 

 

 
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 September 30, 2014 and December 31, 2013:
                                     
    Length of Time in Continuous Unrealized Loss Position        
   
Less Than 12 Months
   
12 Months or More
   
Total
 
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
   
(In thousands)
 
September 30, 2014
                                   
U.S. Government and agency obligations
  $ 16,947     $ (54 )   $ 5,815     $ (183 )   $ 22,762     $ (237 )
State agency & municipal obligations
    3,024       (67 )     -       -       3,024       (67 )
Corporate bonds
    7,053       (73 )     993       (6 )     8,046       (79 )
Total investment securities
  $ 27,024     $ (194 )   $ 6,808     $ (189 )   $ 33,832     $ (383 )
                                                 
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 thirty one and eight individual investment securities as of September 30, 2014 and December 31 2013, respectively, in which the fair value of the security was less than the amortized cost of the security. Management believes the unrealized losses are temporary and are the result of recent market conditions, and determined that there has been no deterioration in credit quality subsequent to purchase.
 
The U.S. Government and agency obligations owned are either direct obligations of the U.S. Government or are issued by one of the shareholder-owned corporations chartered by the U.S. Government and therefore the contractual cash flows are guaranteed. The Company continually monitors its municipal bond portfolio and at this time this portfolio has minimal default risk because 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.
 
15
 

 

 
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 September 30, 2014 and December 31, 2013:
                                     
   
September 30, 2014
   
December 31, 2013
 
(In thousands)
 
Originated
   
Acquired
   
Total
   
Originated
   
Acquired
   
Total
 
                                     
Real estate loans:
                                   
Residential
  $ 167,362     $ -     $ 167,362     $ 155,874     $ -     $ 155,874  
Commercial
    394,004       6,911       400,915       305,823       9,939       315,762  
Construction
    52,387       893       53,280       44,187       7,308       51,495  
Home equity
    9,539       3,294       12,833       9,625       3,872       13,497  
      623,292       11,098       634,390       515,509       21,119       536,628  
Commercial business
    105,123       2,038       107,161       92,173       2,374       94,547  
                                                 
Consumer
    190       343       533       225       612       837  
Total loans
    728,605       13,479       742,084       607,907       24,105       632,012  
                                                 
Allowance for loan losses
    (9,552 )     -       (9,552 )     (8,382 )     -       (8,382 )
Deferred loan origination fees, net
    (2,400 )     -       (2,400 )     (1,785 )     (31 )     (1,816 )
Unamortized loan premiums
    16       -       16       16       -       16  
Loans receivable, net
  $ 716,669     $ 13,479     $ 730,148     $ 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 nine months ended September 30, 2014:
       
(In thousands)
 
Three Months Ended
September 30, 2014
 
Balance at beginning of period
  $ 817  
Acquisition
    -  
Accretion
    (81 )
Other (a)
    -  
Balance at end of period
  $ 736  
         
(In thousands)
 
Nine Months Ended
September 30, 2014
 
Balance at beginning of period
  $ 1,418  
Acquisition
    -  
Accretion
    (338 )
Other (a)
    (344 )
Balance at end of period
  $ 736  
   
a)
Represents changes in cash flows expected to be collected due to loan sales or payoffs.
 
16
 

 

 
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, depending on the borrowers’ creditworthiness and the type of collateral. The market value of collateral is monitored on an ongoing basis and additional collateral is obtained when warranted. Real estate is the primary form of collateral. Other important forms of collateral are business assets, time deposits and marketable securities. While collateral provides assurance as a secondary source of repayment, the Company ordinarily requires the primary source of repayment to be based on the borrower’s ability to generate continuing cash flows. The Company's policy for residential lending allows that, generally, the amount of the loan may not exceed 80% of the original appraised value of the property. In certain situations, the amount may be up to 90-95% LTV either with private mortgage insurance being required for that portion of the residential loan in excess of 80% of the appraised value of the property or where secondary financing is provided by a housing authority program second mortgage, a community's low/moderate income housing program, or a religious or civic organization. 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.  
 
17
 

 

 
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 $0 at September 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 nine months ended September 30, 2014 and 2013, by portfolio segment:
                                                 
   
Residential
Real Estate
   
Commercial
Real Estate
   
Construction
   
Home Equity
   
Commercial
Business
   
Consumer
   
Unallocated
   
Total
 
   
(In thousands)
 
                                                 
Three Months Ended September 30, 2014
                                               
Originated
                                               
Beginning balance
  $ 1,392     $ 4,024     $ 776     $ 188     $ 2,291     $ 6     $ 307     $ 8,984  
Charge-offs
    -       -       -       -       -       -       -       -  
Recoveries
    -       -       -       -       -       1       -       1  
Provisions
    19       637       115       3       100       -       (307 )     567  
Ending balance
  $ 1,411     $ 4,661     $ 891     $ 191     $ 2,391     $ 7     $ -     $ 9,552  
                                                                 
Acquired
                                                               
Beginning balance
  $ -     $ -     $ -     $ -     $ 1     $ -     $ -     $ 1  
Charge-offs
    -       -       -       -       -       -       -       -  
Recoveries
    -       -       -       -       -       -       -       -  
Provisions
    -       -       -       -       (1 )     -       -       (1 )
Ending balance
  $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
                                                                 
Total
                                                               
Beginning balance
  $ 1,392     $ 4,024     $ 776     $ 188     $ 2,292     $ 6     $ 307     $ 8,985  
Charge-offs
    -       -       -       -       -       -       -       -  
Recoveries
    -       -       -       -       -       1       -       1  
Provisions
    19       637       115       3       99       -       (307 )     566  
Ending balance
  $ 1,411     $ 4,661     $ 891     $ 191     $ 2,391     $ 7     $ -     $ 9,552  
 
18
 

 

 
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
                                                 
   
Residential
Real Estate
   
Commercial
Real Estate
   
Construction
   
Home Equity
   
Commercial
Business
   
Consumer
   
Unallocated
   
Total
 
   
(In thousands)
 
Three Months Ended September 30, 2013
                                               
                                                 
Beginning balance
  $ 1,326     $ 3,672     $ 1,013     $ 213     $ 1,766     $ 91     $ 143       8,224  
Charge-offs
    -       -       -       -       -       -       -       -  
Recoveries
    -       -       -       -       -       6       -       6  
Provisions
    143       (81 )     (85 )     (1 )     286       (87 )     (128 )     47  
Ending balance
  $ 1,469     $ 3,591     $ 928     $ 212     $ 2,052     $ 10     $ 15     $ 8,277  
                                                                 
   
Residential
Real Estate
   
Commercial
Real Estate
   
Construction
   
Home Equity
   
Commercial
Business
   
Consumer
   
Unallocated
   
Total
 
   
(In thousands)
 
Nine Months Ended September 30, 2014
                                                               
Originated
                                                               
Beginning balance
  $ 1,310     $ 3,616     $ 1,032     $ 190     $ 2,225     $ 9     $ -     $ 8,382  
Charge-offs
    -       -       -       -       -       (1 )     -       (1 )
Recoveries
    -       -       -       -       -       424       -       424  
Provisions
    101       1,045       (141 )     1       166       (425 )     -       747  
Ending balance
  $ 1,411     $ 4,661     $ 891     $ 191     $ 2,391     $ 7     $ -     $ 9,552  
                                                                 
Acquired