UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

For the quarterly period ended September 30, 2016

 

¨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 registrants principal executive offices)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes ¨ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer,” “accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨  Accelerated filer þ
Non-accelerated filer ¨ (Do not check if a smaller reporting company)

Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes      þ No

 

As of October 31, 2016, there were 7,571,658 shares of the registrants common stock outstanding.

 

 

 

 

  

Bankwell Financial Group, Inc.

Form 10-Q

 

Table of Contents

 

PART I – FINANCIAL INFORMATION  
Item 1. Financial Statements 3
Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015 3
Consolidated Statements of Income for the three and nine months ended September 30, 2016 and 2015 4
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and 2015 5
Consolidated Statements of ShareholdersEquity for the nine months ended September 30, 2016 and 2015 6
Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 7
Notes to Consolidated Financial Statements 9
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations 49
Item 3. Quantitative and Qualitative Disclosures About Market Risk 64
Item 4. Controls and Procedures 64
   
PART II – OTHER INFORMATION  
Item 1. Legal Proceedings 65
Item 1A. Risk Factors 65
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 65
Item 3. Defaults Upon Senior Securities 65
Item 4. Mine Safety Disclosures 65
Item 5. Other Information 65
Item 6. Exhibits 65
   
Signatures 66
   
Certifications  

 

 2 

 

  

PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements

Bankwell Financial Group, Inc.

Consolidated Balance Sheets - (unaudited)

(Dollars in thousands, except share data)

 

   September 30,   December 31, 
   2016   2015 
         
ASSETS          
Cash and due from banks  $94,731   $49,562 
Federal funds sold   1,357    39,035 
Cash and cash equivalents   96,088    88,597 
           
Held to maturity investment securities, at amortized cost   16,909    10,226 
Available for sale investment securities, at fair value   82,752    40,581 
Loans held for sale   400    - 
Loans receivable (net of allowance for loan losses of $17,250 at          
September 30, 2016 and $14,169 at December 31, 2015)   1,305,065    1,129,748 
Foreclosed real estate   272    1,248 
Accrued interest receivable   4,499    4,071 
Federal Home Loan Bank stock, at cost   7,943    6,554 
Premises and equipment, net   10,314    11,163 
Bank-owned life insurance   24,277    23,755 
Goodwill   2,589    2,589 
Other intangible assets   532    652 
Deferred income taxes, net   9,874    8,337 
Other assets   4,072    2,851 
Total assets  $1,565,586   $1,330,372 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Liabilities          
Deposits          
Noninterest bearing deposits  $176,405   $164,553 
Interest bearing deposits   1,040,537    882,389 
Total deposits   1,216,942    1,046,942 
           
Advances from the Federal Home Loan Bank   175,000    120,000 
Subordinated debentures   25,038    25,000 
Accrued expenses and other liabilities   8,034    6,661 
Total liabilities   1,425,014    1,198,603 
           
Commitments and Contingencies   -    - 
           
Shareholders' equity          
Common stock, no par value; 10,000,000 shares authorized, 7,562,508 and 7,516,291 shares issued at September 30, 2016 and December 31, 2015, respectively   113,650    112,579 
Retained earnings   26,859    18,963 
Accumulated other comprehensive income   63    227 
Total shareholders' equity   140,572    131,769 
           
Total liabilities and shareholders' equity  $1,565,586   $1,330,372 

 

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, 
   2016   2015   2016   2015 
                 
Interest and dividend income                    
Interest and fees on loans  $14,914   $12,660   $42,167   $35,310 
Interest and dividends on securities   688    493    2,083    1,474 
Interest on cash and cash equivalents   31    33    98    62 
Total interest income   15,633    13,186    44,348    36,846 
                     
Interest expense                    
Interest expense on deposits   2,160    1,637    5,862    3,905 
Interest on borrowings   946    632    2,682    1,389 
Total interest expense   3,106    2,269    8,544    5,294 
                     
Net interest income   12,527    10,917    35,804    31,552 
                     
Provision for loan losses   1,219    1,489    3,166    2,876 
                     
Net interest income after provision for loan losses   11,308    9,428    32,638    28,676 
                     
Noninterest income                    
Service charges and fees   241    234    721    675 
Bank owned life insurance   174    182    522    549 
Gains and fees from sales of loans   163    447    387    885 
Gain on sale of foreclosed real estate, net   -    -    128    - 
Net gain on sale of available for sale securities   -    -    92    - 
Other   172    348    425    535 
Total noninterest income   750    1,211    2,275    2,644 
                     
Noninterest expense                    
Salaries and employee benefits   3,909    3,798    11,537    11,817 
Occupancy and equipment   1,435    1,370    4,235    4,029 
Professional services   521    339    1,257    1,033 
Data processing   417    416    1,201    1,157 
Marketing   242    288    644    707 
FDIC insurance   177    166    514    487 
Director fees   128    136    423    424 
Foreclosed real estate   47    81    149    73 
Amortization of intangibles   39    51    119    153 
Other   566    513    1,697    1,610 
Total noninterest expense   7,481    7,158    21,776    21,490 
Income before income tax expense   4,577    3,481    13,137    9,830 
Income tax expense   1,437    1,228    4,110    3,418 
Net income  $3,140   $2,253   $9,027   $6,412 
Net income attributable to common shareholders  $3,140   $2,226   $9,027   $6,330 
                     
Earnings Per Common Share:                    
Basic  $0.42   $0.31   $1.20   $0.88 
Diluted  $0.41   $0.31   $1.19   $0.87 
                     
Weighted Average Common Shares Outstanding:                    
Basic   7,397,067    7,044,586    7,388,364    7,038,517 
Diluted   7,488,752    7,059,117    7,459,283    7,057,450 
Dividends per common share  $0.05   $-   $0.15   $- 

 

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, 
   2016   2015   2016   2015 
                 
Net income  $3,140   $2,253   $9,027   $6,412 
Other comprehensive income (loss):                    
Unrealized (losses) gains on securities:                    
Unrealized holding (losses) gains on available for sale securities   (371)   190    986    (262)
Reclassification adjustment for (gain) loss realized in net income   -    -    (92)   - 
Net change in unrealized (losses) gains   (371)   190    894    (262)
Income tax benefit (expense)   130    (74)   (313)   102 
Unrealized (losses) gains on securities, net of tax   (241)   116    581    (160)
Unrealized gains (losses) on interest rate swaps:                    
Unrealized gains (losses) on interest rate swaps designated as cash flow hedges   904    (826)   (1,147)   (1,058)
Income tax (expense) benefit   (316)   322    402    412 
Unrealized gains (losses) on interest rate swaps, net of tax   588    (504)   (745)   (646)
Total other comprehensive income (loss), net of tax   347    (388)   (164)   (806)
Comprehensive income  $3,487   $1,865   $8,863   $5,606 

 

See accompanying notes to consolidated financial statements (unaudited)

 

 5 

 

  

Bankwell Financial Group, Inc.

Consolidated Statements Of Shareholders' Equity – (unaudited)

(In thousands, except share data)

 

               Accumulated     
   Number of           Other     
   Outstanding   Common   Retained   Comprehensive     
   Shares   Stock   Earnings   Income (Loss)   Total 
Balance at December 31, 2015   7,516,291   $112,579   $18,963   $227   $131,769 
Net income   -    -    9,027    -    9,027 
Other comprehensive loss, net of tax   -    -    -    (164)   (164)
Cash dividends declared ($0.15 per share)   -    -    (1,131)   -    (1,131)
Stock-based compensation expense   -    788    -    -    788 
Forfeitures of restricted stock   (683)   -    -    -    - 
Issuance of restricted stock   29,300    -    -    -    - 
Stock options exercised   17,600    283    -    -    283 
Balance at September 30, 2016   7,562,508   $113,650   $26,859   $63   $140,572 

 

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

 

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, 
   2016   2015 
Cash flows from operating activities          
Net income  $9,027   $6,412 
Adjustments to reconcile net income to net cash provided by operating activities:          
Net amortization of premiums and discounts on investment securities   493    89 
Provision for loan losses   3,166    2,876 
Provision for deferred taxes   (1,448)   (1,074)
Net gain on sales of available for sale securities   (92)   - 
Depreciation and amortization   1,305    1,256 
Increase in cash surrender value of bank-owned life insurance   (522)   (549)
Loan principal sold   (6,214)   (13,082)
Proceeds from sales of loans   6,201    14,301 
Net gain on sales of loans   (387)   (885)
Stock-based compensation   788    796 
Net accretion of purchase accounting adjustments   (107)   (104)
Gain on sale and write-downs of foreclosed real estate   25    104 
Net change in:          
Deferred loan fees   316    612 
Accrued interest receivable   (428)   (508)
Other assets   (2,130)   (1,054)
Accrued expenses and other liabilities   1,374    949 
Net cash provided by operating activities   11,367    10,139 
           
Cash flows from investing activities          
Proceeds from principal repayments on available for sale securities   734    1,612 
Proceeds from principal repayments on held to maturity securities   155    165 
Net proceeds from sales and calls of available for sale securities   8,813    18,030 
Purchases of available for sale securities   (51,228)   - 
Purchases of held to maturity securities   (6,834)   - 
Net increase in loans   (178,861)   (196,984)
Purchases of premises and equipment   (456)   (851)
Purchase of Federal Home Loan Bank stock   (1,390)   (809)
Proceeds from sale of foreclosed real estate   951    400 
Net cash used by investing activities   (228,116)   (178,437)

 

See accompanying notes to consolidated financial statements (unaudited)

 

 7 

 

  

Consolidated Statements Of Cash Flows- (Continued)

(In thousands)

 

   Nine Months Ended 
   September 30, 
   2016   2015 
Cash flows from financing activities          
Net change in time certificates of deposit  $157,904   $119,805 
Net change in other deposits   12,145    70,551 
Increase in subordinated debt   -    25,037 
Amortization of debt issuance costs   39    - 
Net change in FHLB advances   55,000    (9,000)
Proceeds from exercise of options   283    258 
Dividends paid on common stock   (1,131)   - 
Dividends paid on preferred stock   -    (82)
Net cash provided by financing activities   224,240    206,569 
Net increase in cash and cash equivalents   7,491    38,271 
Cash and cash equivalents:          
Beginning of year   88,597    48,559 
End of period  $96,088   $86,830 
Supplemental disclosures of cash flows information:          
Cash paid for:          
Interest  $8,429   $4,825 
Income taxes   6,379    5,076 
Noncash investing and financing activities          
Loans transferred to foreclosed real estate  $-   $883 

 

See accompanying notes to consolidated financial statements (unaudited)

 

 8 

 

  

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

1.Nature of Operations and Summary of Significant Accounting Policies

 

Bankwell Financial Group, Inc. (the Companyor Bankwell) is a bank holding company headquartered in New Canaan, Connecticut. The Company offers a broad range of financial services through its banking subsidiary, Bankwell Bank (the Bank). The Bank was originally chartered as two separate banks, The Bank of New Canaan (BNC) and The Bank of Fairfield (TBF). In September 2013, BNC and TBF were merged and rebranded as Bankwell Bank. In November 2013, the Bank acquired The Wilton Bank (Wilton), which added one branch and approximately $25.1 million in loans and $64.2 million in deposits. In October 2014, the Bank acquired Quinnipiac Bank and Trust Company (Quinnipiac) which added two branches and approximately $97.8 million in loans and $100.6 million in deposits.

 

The Bank is a Connecticut state chartered commercial bank, founded in 2002, whose deposits are insured under the Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation (FDIC). The Bank provides a full range of banking services to commercial and consumer customers, primarily concentrated in the Fairfield County and New Haven County regions of Connecticut, with branch locations in New Canaan, Stamford, Fairfield, Wilton, Norwalk, Hamden and North Haven, Connecticut.

 

Principles of consolidation

 

The consolidated interim financial statements include the accounts of the Company and the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Use of estimates

 

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (GAAP) and general practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities as of the date of the consolidated balance sheet and revenue and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the allowance for loan losses, stock-based compensation and derivative instrument valuation.

 

Basis of consolidated financial statement presentation

 

The unaudited consolidated financial statements presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (SEC) for quarterly reports on Form 10-Q and Rule 10-1 of Regulation S-X and do not include all of the information and note disclosures required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for the fair presentation of the accompanying unaudited interim consolidated financial statements have been included. Interim results are not necessarily reflective of the results that may be expected for the year ending December 31, 2016. The accompanying unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included on Form 10-K for the year ended December 31, 2015.

 

Significant concentrations of credit risk

 

Most of the Company's activities are with customers located within Fairfield and New Haven Counties and the surrounding region of Connecticut, and declines in property values in these areas could significantly impact the Company. The Company has significant concentrations in commercial real estate loans. Management does not believe they present any special risk. The Company does not have any significant concentrations in any one industry or customer.

 

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Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

Reclassification

 

Certain prior period amounts have been reclassified to conform to the 2016 financial statement presentation. These reclassifications only changed the reporting categories and did not affect the consolidated results of operations or consolidated financial position.

 

Recent accounting pronouncements

 

The following section includes changes in accounting principles and potential effects of new accounting guidance and pronouncements.

 

ASU No. 2014-09 – Revenue from Contracts with Customers (Topic 606). The ASU establishes a single comprehensive model for an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled, and will supersede nearly all existing revenue recognition guidance, to clarify and converge revenue recognition principles under US GAAP and IFRS. The update outlines five steps to recognizing revenue: (i) identify the contracts with the customer; (ii) identify the separate performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the separate performance obligations; (v) recognize revenue when each performance obligation is satisfied. The update requires more comprehensive disclosures, relating to quantitative and qualitative information for amounts, timing, the nature and uncertainty of revenue, and cash flows arising from contracts with customers, which will mainly impact construction and high-tech industries. The most significant potential impact to banking entities relates to less prescriptive derecognition requirements on the sale of OREO property. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. Accordingly, the amendments are effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted for annual and interim reporting periods beginning after December 15, 2016. An entity may elect either a full retrospective or a modified retrospective application. The Company does not expect the application of this guidance to have a material impact on the Company's financial statements.

 

ASU No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force). The ASU provides explicit guidance to account for a performance target that could be achieved after the requisite service period as a performance condition. For awards within the scope of this update, the Task Force decided that an entity should apply existing guidance in Topic 718 as it relates to share-based payments with performance conditions that affect vesting. Consistent with that guidance, performance conditions that affect vesting should not be reflected in estimating the fair value of an award at the grant date. Compensation cost should be recognized when it is probable that the performance target will be achieved and should represent the compensation cost attributable to the period for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The amendments were effective for the Company as of January 1, 2016. This ASU did not impact the Companys financial statements and the Company does not expect the application of this guidance will have a material impact on the Companys financial statements in the future.

 

 10 

 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

ASU No. 2015-03, Interest Imputation of Interest (Subtopic 835-20): Simplifying the Presentation of Debt Issuance Costs.The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments are effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The Company elected to early adopt the provisions of ASU 2015-03 upon issuance of its subordinated debentures on August 19, 2015 and recorded $0.5 million of debt issuance costs incurred as a direct deduction from the debt liability.

 

ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU has been issued to improve the recognition and measurement of financial instruments by requiring 1) equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; 3) the use of the exit price notion when measuring fair value of financial instruments for disclosure purposes; and 4) separate presentation by the reporting organization in other comprehensive income for the portion of the total change in the fair value of a liability resulting from the change in the instrument-specific credit risk (also referred to as own credit) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The standard is effective for the Company beginning on January 1, 2018. The Company does not expect the application of this guidance to have a material impact on the Companys financial statements.

 

ASU 2016-02, Leases (Topic 842). The amendments in this ASU require lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases. Accounting by lessors will remain largely unchanged. The guidance will be effective for annual periods, and interim periods within those annual periods, beginning, for the Company, on January 1, 2019, with early adoption permitted. Adoption will require a modified retrospective transition where the lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented. The Company does not expect the application of this guidance to have a material impact on the Companys financial statements.

 

ASU 2016-09, Compensation Stock – Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU changes how companies account for certain aspects of share-based payments to employees. Entities will be required to recognize the income tax effects of awards in the statement of income when the awards vest or are settled, the guidance on employersaccounting for an employees use of shares to satisfy the employers statutory income tax withholding obligation and for forfeitures is changing and the update requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. The amendments in this update will be effective for the Company on January 1, 2017 and interim periods within that annual period. Early adoption is permitted. The Company does not expect the application of this guidance to have a material impact on the Companys financial statements.

 

ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking expected loss model that will replace todays incurred lossmodel and can result in the earlier recognition of credit losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. The amendments in this update will be effective for the Company on January 1, 2020, including interim periods within that fiscal year. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is currently evaluating the impact of its pending adoption of this guidance on the Companys financial statements.

 

 11 

 

  

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU changes how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. The amendments address the classification of the following eight items in the statement of cash flows; debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the Predominance Principle. The amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not expect the application of this guidance to have a material impact on the Companys 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 value of available for sale and held to maturity securities at September 30, 2016 were as follows:

 

   September 30, 2016 
   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  $53,980   $600   $(1)  $54,579 
Due after ten years   100    -    (1)   99 
    54,080    600    (2)   54,678 
                     
State agency, U.S. Territories and municipal obligations                    
Due from one through five years   826    44    -    870 
Due from five through ten years   10,216    517    (248)   10,485 
Due after ten years   4,923    292    (10)   5,205 
    15,965    853    (258)   16,560 
                     
Corporate bonds                    
Due in less than one year   2,023    21    -    2,044 
Due from one through five years   9,165    305    -    9,470 
    11,188    326    -    11,514 
Total available for sale securities  $81,233   $1,779   $(260)  $82,752 
Held to maturity securities:                    
State agency, U.S. Territories and municipal obligations                    
Due from one through five years  $2,135   $-   $-   $2,135 
Due after ten years   13,614    -    -    13,614 
    15,749    -    -    15,749 
Corporate bonds                    
Due from one through five years   1,000    -    (25)   975 
Government-sponsored mortgage backed securities                    
No contractual maturity   160    17    -    177 
Total held to maturity securities  $16,909   $17   $(25)  $16,901 

 

 13 

 

  

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

The amortized cost, gross unrealized gains and losses and fair value of available for sale and held to maturity securities at December 31, 2015 were as follows:

 

   December 31, 2015 
   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  $6,198   $-   $(77)  $6,121 
Due from five through ten years   394    4    (2)   396 
Due after ten years   647    -    (21)   626 
    7,239    4    (100)   7,143 
                     
State agency, U.S. Territories and municipal obligations                    
Due from one through five years   520    39    -    559 
Due from five through ten years   9,762    361    (322)   9,801 
Due after ten years   6,778    367    (1)   7,144 
    17,060    767    (323)   17,504 
                     
Corporate bonds                    
Due in less than one year   1,010    22    -    1,032 
Due from one through five years   9,233    156    (9)   9,380 
Due from five through ten years   1,013    12    -    1,025 
    11,256    190    (9)   11,437 
                     
Government-sponsored mortgage backed securities                    
No contractual maturity   4,400    107    (10)   4,497 
    4,400    107    (10)   4,497 
                     
Total available for sale securities  $39,955   $1,068   $(442)  $40,581 
Held to maturity securities:                    
State agency, U.S. Territories and municipal obligations                    
Due after ten years  $9,026   $-   $-   $9,026 
Corporate bonds                    
Due from one through five years   1,000    -    (19)   981 
Government-sponsored mortgage backed securities                    
No contractual maturity   200    21    -    221 
Total held to maturity securities  $10,226   $21   $(19)  $10,228 

 

The realized gain on the sale of investment securities totaled $92 thousand for the nine months ended September 30, 2016. There were no sales of or realized gains or losses on investment securities during the three months ended September 30, 2016 and the three and nine months ended September 30, 2015.

 

At September 30, 2016 and December 31, 2015, securities with approximate fair values of $6.1 million and $5.9 million were pledged as collateral for public deposits, respectively.

 

 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, 2016 and December 31, 2015:

 

   Length of Time in Continuous Unrealized Loss Position     
   Less Than 12 Months   12 Months or More   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Loss   Value   Loss   Value   Loss 
   (In thousands) 
September 30, 2016                              
U.S. Government and agency obligations  $1,098   $(2)  $-   $-   $1,098   $(2)
State agency, U.S. Territories and municipal obligations   402    (10)   748    (248)   1,150    (258)
Corporate bonds   975    (25)   -    -    975    (25)
Total investment securities  $2,475   $(37)  $748   $(248)  $3,223   $(285)
                               
December 31, 2015                              
U.S. Government and agency obligations  $5,486   $(60)  $1,259   $(40)  $6,745   $(100)
State agency, U.S. Territories and municipal obligations   126    (1)   665    (322)   791    (323)
Corporate bonds   1,970    (28)   -    -    1,970    (28)
Government-sponsored mortgage backed securities   768    (4)   413    (6)   1,181    (10)
Total investment securities  $8,350   $(93)  $2,337   $(368)  $10,687   $(461)

 

There were 5 and 29 investment securities as of September 30, 2016 and December 31, 2015, respectively, in which the fair value of the security was less than the amortized cost of the security.

 

The U.S. Government and agency obligations owned are either direct obligations of the U.S. Government or are issued by one of the shareholder-owned corporations chartered by the U.S. Government, therefore the contractual cash flows are guaranteed and as a result the unrealized losses in this portfolio are not considered other than temporarily impaired.

 

The Company continually monitors its state agency, U.S. Territories, municipal and corporate bond portfolios and at this time these portfolios have minimal default risk because state agency, U.S. Territories, municipal and corporate bonds are all rated above investment grade except for one U.S. Territory bond (a Commonwealth of Puerto Rico senior lien sales tax financing corporate bond or “COFINA” bond) with a cost of $995.0 thousand and a market value of $747.5 thousand as of September 30, 2016 that is rated two levels below investment grade. The Company has determined that the unrealized loss on this U.S. Territory bond is, as of September 30, 2016, not other than temporarily impaired because payments are backed by a senior lien position on dedicated cash receipts from sales tax revenue with strong debt service coverage. Subsequent to September 30, 2016, on November 2, 2016, the Company sold the COFINA bond resulting in a $251.6 thousand realized loss.

 

 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 and the Quinnipiac acquisition in October 2014 are referred to as acquiredloans as a result of the manner in which they are accounted for. All other loans are referred to as originatedloans. 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, 2016 and December 31, 2015:

 

   September 30, 2016   December 31, 2015 
(In thousands)  Originated   Acquired   Total   Originated   Acquired   Total 
                         
Real estate loans:                              
Residential  $176,206   $2,790   $178,996   $174,311   $2,873   $177,184 
Commercial   770,237    46,769    817,006    643,524    54,018    697,542 
Construction   104,801    114    104,915    81,242    1,031    82,273 
Home equity   8,791    6,259    15,050    9,146    6,780    15,926 
    1,060,035    55,932    1,115,967    908,223    64,702    972,925 
                               
Commercial business   188,705    19,895    208,600    150,479    22,374    172,853 
Consumer   618    1,042    1,660    117    1,618    1,735 
Total loans   1,249,358    76,869    1,326,227    1,058,819    88,694    1,147,513 
                               
Allowance for loan losses   (17,215)   (35)   (17,250)   (14,128)   (41)   (14,169)
Deferred loan origination fees, net   (3,921)   -    (3,921)   (3,605)   -    (3,605)
Unamortized loan premiums   9    -    9    9    -    9 
Loans receivable, net  $1,228,231   $76,834   $1,305,065   $1,041,095   $88,653   $1,129,748 

 

Lending activities are conducted principally in the Fairfield and New Haven county regions of Connecticut, and consist of residential and commercial real estate loans, commercial business loans and a variety of consumer loans. Loans may also be granted for the construction of residential homes and commercial properties. All residential and commercial mortgage loans are typically collateralized by first or second mortgages on real estate.

 

Certain acquired loans were determined to have evidence of credit deterioration at the acquisition date. Such loans are accounted for in accordance with ASC 310-30.

 

 

 16 

 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

The following table summarizes activity in the accretable yields for the acquired loan portfolio that falls under the purview of ASC 310-30:

  

(In thousands)  Three Months Ended September 30,   Nine Months Ended September 30, 
   2016   2015   2016   2015 
Balance at beginning of period  $733   $1,134   $871   $1,382 
Acquisition   -    -    -    - 
Accretion   (36)   (21)   (123)   (137)
Other (a)   -    (145)   (51)   (277)
Balance at end of period  $697   $968   $697   $968 

 

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

 

Risk management

 

The Company has established credit policies applicable to each type of lending activity in which it engages. The Company evaluates the creditworthiness of each customer and extends credit of up to 80% of the market value of the collateral, depending on the borrowers’ creditworthiness and the type of collateral. The borrowers ability to service the debt is monitored on an ongoing basis. Real estate is the primary form of collateral. Other important forms of collateral are business assets, time deposits and marketable securities. While collateral provides assurance as a secondary source of repayment, the Company ordinarily requires the primary source of repayment to be based on the borrower’s ability to generate continuing cash flows. The Companys 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 exceed 80% 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 communitys low/moderate income housing program, a religious or civic organization. Private mortgage insurance may be required for that portion of the residential first mortgage loan in excess of 80% of the appraised value of the property.

 

Credit quality of loans and the allowance for loan losses

 

Management segregates the loan portfolio into portfolio segments which is defined as the level at which the Company develops and documents a systematic method for determining its allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate.

 

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.

 

 17 

 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

Construction: This portfolio segment includes commercial construction loans for commercial development projects, including condominiums, apartment buildings, and single family subdivisions as well as office buildings, retail and other income producing properties and land loans, which are loans made with land as security. Construction and land development financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, the Company may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment. Construction loans also expose the Company to the risks that improvements will not be completed on time in accordance with specifications and projected costs and that repayment will depend on the successful operation or sale of the properties, which may cause some borrowers to be unable to continue with debt service which exposes the Company to greater risk of non-payment and loss.

 

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

 

Commercial Business: This portfolio segment includes commercial business loans secured by assignments of corporate assets and personal guarantees of the business owners. Commercial business loans generally have higher interest rates and shorter terms than other loans, but they also may involve higher average balances, increased difficulty of loan monitoring and a higher risk of default since their repayment generally depends on the successful operation of the borrower’s business.

 

Consumer: This portfolio segment includes loans secured by savings or certificate accounts, or automobiles, as well as unsecured personal loans and overdraft lines of credit. This type of loan entails greater risk than residential mortgage loans, particularly in the case of loans that are unsecured or secured by assets that depreciate rapidly.

 

 18 

 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

Allowance for loan losses

 

The following tables set forth the activity in the Companys allowance for loan losses for the three and nine months ended September 30, 2016 and 2015, by portfolio segment:

 

   Residential   Commercial       Home   Commercial         
   Real Estate   Real Estate   Construction   Equity   Business   Consumer   Total 
   (In thousands) 
Three Months Ended September 30, 2016                     
Originated                                   
Beginning balance  $1,484   $8,625   $1,920   $179   $3,792   $39   $16,039 
Charge-offs   -    -    -    -    (59)   (2)   (61)
Recoveries   -    -    -    -    -    2    2 
Provisions   (4)   472    159    (9)   306    311    1,235 
Ending balance  $1,480   $9,097   $2,079   $170   $4,039   $350   $17,215 
                                    
Acquired                                   
Beginning balance  $-   $23   $-   $11   $24   $3   $61 
Charge-offs   -    -    -    -    (10)   -    (10)
Recoveries   -    -    -    -    -    -    - 
Provisions   -    6    -    (11)   (11)   -    (16)
Ending balance  $-   $29   $-   $-   $3   $3   $35 
                                    
Total                                   
Beginning balance  $1,484   $8,648   $1,920   $190   $3,816   $42   $16,100 
Charge-offs   -    -    -    -    (69)   (2)   (71)
Recoveries   -    -    -    -    -    2    2 
Provisions   (4)   478    159    (20)   295    311    1,219 
Ending balance  $1,480   $9,126   $2,079   $170   $4,042   $353   $17,250 

 

 19 

 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

  

   Residential   Commercial       Home   Commercial         
   Real Estate   Real Estate   Construction   Equity   Business   Consumer   Total 
   (In thousands) 
Three Months Ended September 30, 2015                        
Originated                                   
Beginning balance  $1,454   $6,832   $1,138   $169   $2,618   $9   $12,220 
Charge-offs   -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    1    1 
Provisions   (40)   722    399    11    369    (7)   1,454 
Ending balance  $1,414   $7,554   $1,537   $180   $2,987   $3   $13,675 
                                    
Acquired                                   
Beginning balance  $-   $-   $-   $-   $10   $-   $10 
Charge-offs   -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    - 
Provisions   -    10    -    -    20    5    35 
Ending balance  $-   $10   $-   $-   $30   $5   $45 
                                    
Total                                   
Beginning balance  $1,454   $6,832   $1,138   $169   $2,628   $9   $12,230 
Charge-offs   -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    1    1 
Provisions   (40)   732    399    11    389    (2)   1,489 
Ending balance  $1,414   $7,564   $1,537   $180   $3,017   $8   $13,720 

 

 20 

 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

   Residential   Commercial       Home   Commercial         
   Real Estate   Real Estate   Construction   Equity   Business   Consumer   Total 
   (In thousands) 
Nine Months Ended September 30, 2016                     
Originated                                   
Beginning balance  $1,444   $7,693   $1,504   $174   $3,310   $3   $14,128 
Charge-offs   -    -    -    -    (59)   (10)   (69)
Recoveries   -    -    -    -    -    7    7 
Provisions   36    1,404    575    (4)   788    350    3,149 
Ending balance  $1,480   $9,097   $2,079   $170   $4,039   $350   $17,215 
                                    
Acquired                                   
Beginning balance  $-   $12   $-   $-   $24   $5   $41 
Charge-offs   -    -    (7)   -    (10)   (6)   (23)
Recoveries   -    -    -    -    -    -    - 
Provisions   -    17    7    -    (11)   4    17 
Ending balance  $-   $29   $-   $-   $3   $3   $35 
                                    
Total                                   
Beginning balance  $1,444   $7,705   $1,504   $174   $3,334   $8   $14,169 
Charge-offs   -    -    (7)   -    (69)   (16)   (92)
Recoveries   -    -    -    -    -    7    7 
Provisions   36    1,421    582    (4)   777    354    3,166 
Ending balance  $1,480   $9,126   $2,079   $170   $4,042   $353   $17,250 

 

 21 

 

  

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

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

 

 22 

 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

The following tables are a summary, by portfolio segment and impairment methodology, of the allowance for loan losses and related portfolio balances at September 30, 2016 and December 31, 2015:

 

   Originated Loans   Acquired Loans   Total 
   Portfolio   Allowance   Portfolio   Allowance   Portfolio   Allowance 
   (In thousands) 
September 30, 2016                              
Loans individually evaluated for impairment:                      
Residential real estate  $969   $-   $-   $-   $969   $- 
Commercial real estate   3,684    2    563    7    4,247    9 
Home equity   263    -    454    -    717    - 
Commercial business   576    5    1,213    3    1,789    8 
Consumer   341    341    3    3    344    344 
Subtotal   5,833    348    2,233    13    8,066    361 
Loans collectively evaluated for impairment:                      
Residential real estate   175,237    1,480    2,790    -    178,027    1,480 
Commercial real estate   766,553    9,095    46,206    22    812,759    9,117 
Construction   104,801    2,079    114    -    104,915    2,079 
Home equity   8,528    170    5,805    -    14,333    170 
Commercial business   188,129    4,034    18,682    -    206,811    4,034 
Consumer   277    9    1,039    -    1,316    9 
Subtotal   1,243,525    16,867    74,636    22    1,318,161    16,889 
                               
Total  $1,249,358   $17,215   $76,869   $35   $1,326,227   $17,250 

 

 23 

 

 

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, 2015                              
Loans individually evaluated for impairment:                      
Residential real estate  $1,833   $2   $-   $-   $1,833   $2 
Commercial real estate   4,291    -    762    12    5,053    12 
Home equity   422    -    197    -    619    - 
Commercial business   1,977    71    1,433    21    3,410    92 
Consumer   -    -    7    5    7    5 
Subtotal   8,523    73    2,399    38    10,922    111 
Loans collectively evaluated for impairment:                      
Residential real estate   172,478    1,442    2,873    -    175,351    1,442 
Commercial real estate   639,233    7,692    53,256    -    692,489    7,692 
Construction   81,242    1,504    1,031    -    82,273    1,504 
Home equity   8,724    174    6,583    -    15,307    174 
Commercial business   148,502    3,239    20,941    3    169,443    3,242 
Consumer   117    4    1,611    -    1,728    4 
Subtotal   1,050,296    14,055    86,295    3    1,136,591    14,058 
                               
Total  $1,058,819   $14,128   $88,694   $41   $1,147,513   $14,169 

 

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.

 

 24 

 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

The following tables are a summary of the loan portfolio quality indicators by portfolio segment at September 30, 2016 and December 31, 2015:

 

   Commercial Credit Quality Indicators 
   At September 30, 2016   At December 31, 2015 
   Commercial       Commercial       Commercial       Commercial     
   Real Estate   Construction   Business   Total   Real Estate   Construction   Business   Total 
   (In thousands) 
Originated loans:                                        
Pass  $762,916   $104,801   $186,984   $1,054,701   $638,709   $81,242   $148,748   $868,699 
Special mention   3,637    -    1,262    4,899    1,595    -    1,118    2,713 
Substandard   3,684    -    459    4,143    3,220    -    549    3,769 
Doubtful   -    -    -    -    -    -    -    - 
Loss   -    -    -    -    -    -    64    64 
Total originated loans   770,237    104,801    188,705    1,063,743    643,524    81,242    150,479    875,245 
Acquired loans:                                        
Pass   43,770    114    18,962    62,846    52,427    230    20,794    73,451 
Special mention   1,847    -    162    2,009    -    -    598    598 
Substandard   1,152    -    771    1,923    1,591    801    982    3,374 
Doubtful   -    -    -    -    -    -    -    - 
Loss   -    -    -    -    -    -    -    - 
Total acquired loans   46,769    114    19,895    66,778    54,018    1,031    22,374    77,243 
Total loans:                                        
Pass   806,686    104,915    205,946    1,117,547    691,136    81,472    169,542    942,150 
Special mention   5,484    -    1,424    6,908    1,595    -    1,716    3,311 
Substandard   4,836    -    1,230    6,066    4,811    801    1,531    7,143 
Doubtful   -    -    -    -    -    -    -    - 
Loss   -    -    -    -    -    -    64    64 
Total loans  $817,006   $104,915   $208,600   $1,130,521   $697,542   $82,273   $172,853   $952,668 

 

 25 

 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

  

   Residential and Consumer Credit Quality Indicators 
   At September 30, 2016   At December 31, 2015 
   Residential               Residential             
   Real Estate   Home Equity   Consumer   Total   Real Estate   Home Equity   Consumer   Total 
   (In thousands)  
Originated loans:                                        
Pass  $175,237   $8,528   $277   $184,042   $172,478   $8,725   $117   $181,320 
Special mention   -    72    -    72    864    80    -    944 
Substandard   969    191    -    1,160    969    341    -    1,310 
Doubtful   -    -    -    -    -    -    -    - 
Loss   -    -    341    341    -    -    -    - 
Total originated loans   176,206    8,791    618    185,615    174,311    9,146    117    183,574 
Acquired loans:                                        
Pass   2,790    5,805    1,039    9,634    2,873    6,545    1,539    10,957 
Special mention   -    -    -    -    -    -    -    - 
Substandard   -    454    3    457    -    235    79    314 
Doubtful   -    -    -    -    -    -    -    - 
Loss   -    -    -    -    -    -    -    - 
Total acquired loans   2,790    6,259    1,042    10,091    2,873    6,780    1,618    11,271 
Total loans:                                        
Pass   178,027    14,333    1,316    193,676    175,351    15,270    1,656    192,277 
Special mention   -    72    -    72    864    80    -    944 
Substandard   969    645    3    1,617    969    576    79    1,624 
Doubtful   -    -    -    -    -    -    -    - 
Loss   -    -    341    341    -    -    -    - 
Total loans  $178,996   $15,050   $1,660   $195,706   $177,184   $15,926   $1,735   $194,845 

 

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 or may take other appropriate legal action. 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.

 

 26 

 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

  

The following tables set forth certain information with respect to our loan portfolio delinquencies by portfolio segment and amount as of September 30, 2016 and December 31, 2015:

 

   As of September 30, 2016 
           Greater             
   31-60 Days   61-90 Days   Than 90   Total Past         
   Past Due   Past Due   Days   Due   Current   Total Loans 
   (In thousands) 
Originated Loans                              
Real estate loans:                              
Residential real estate  $-   $-   $969   $969   $175,237   $176,206 
Commercial real estate   303    -    -    303    769,934    770,237 
Construction   -    -    -    -    104,801    104,801 
Home equity   132    -    -    132    8,659    8,791 
Commercial business   941    -    -    941    187,764    188,705 
Consumer   341    -    -    341    277    618 
Total originated loans   1,717    -    969    2,686    1,246,672    1,249,358 
Acquired Loans                              
Real estate loans:                              
Residential real estate   -    -    -    -    2,790    2,790 
Commercial real estate   167    -    563    730    46,039    46,769 
Construction   -    -    -    -    114    114 
Home equity   -    -    454    454    5,805    6,259 
Commercial business   134    52    -    186    19,709    19,895 
Consumer   17    -    -    17    1,025    1,042 
Total acquired loans   318    52    1,017    1,387    75,482    76,869 
Total loans  $2,035   $52   $1,986   $4,073   $1,322,154   $1,326,227 

 

 27 

 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

  

   As of December 31, 2015 
           Greater             
   31-60 Days   61-90 Days   Than 90   Total Past         
   Past Due   Past Due   Days   Due   Current   Total Loans 
   (In thousands) 
Originated Loans                              
Real estate loans:                              
Residential real estate  $-   $-   $969   $969   $173,342   $174,311 
Commercial real estate   -    311    -    311    643,213    643,524 
Construction   -    -    -    -    81,242    81,242 
Home equity   198    -    -    198    8,948    9,146 
Commercial business   1,078    100    343    1,521    148,958    150,479 
Consumer   -    -    -    -    117    117 
Total originated loans   1,276    411    1,312    2,999    1,055,820    1,058,819 
Acquired Loans                              
Real estate loans:                              
Residential real estate   -    -    -    -    2,873    2,873 
Commercial real estate   333    -    762    1,095    52,923    54,018 
Construction   -    -    801    801    230    1,031 
Home equity   100    162    191    453    6,327    6,780 
Commercial business   262    71    101    434    21,940    22,374 
Consumer   17    -    -    17    1,601    1,618 
Total acquired loans   712    233    1,855    2,800    85,894    88,694 
Total loans  $1,988   $644   $3,167   $5,799   $1,141,714   $1,147,513 

 

There were no loans delinquent greater than 90 days and still accruing as of September 30, 2016 and there were $1.1 million of loans delinquent greater than 90 days and still accruing as of December 31, 2015.

 

 28 

 

 

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 September 30, 2016 and December 31, 2015:

 

   September 30,   December 31, 
   2016   2015 
   (In thousands) 
Residential real estate  $969   $970 
Commercial real estate   1,104    1,264 
Home equity   645    395 
Commercial business   585    1,160 
Consumer   341    2 
Total  $3,644   $3,791 

 

The amount of income that was contractually due but not recognized on originated nonaccrual loans totaled $15 thousand and $38 thousand, respectively for the three months ended September 30, 2016, and 2015. The amount of income that was contractually due but not recognized on originated nonaccrual loans totaled $39 thousand and $110 thousand, respectively for the nine months ended September 30, 2016, and 2015. There was no and $3 thousand actual interest income recognized on these loans for the nine months ended September 30, 2016, and 2015, respectively.

 

At September 30, 2016 and December 31, 2015, there were no and $169 thousand of commitments to lend additional funds to any borrower on nonaccrual status, respectively.

 

The preceding table excludes acquired loans that are accounted for as purchased credit impaired loans totaling $0.0 million and $1.1 million, respectively at September 30, 2016 and December 31, 2015. 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.

 

 29 

 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

  

The following table summarizes impaired loans by portfolio segment as of September 30, 2016 and December 31, 2015:

 

   Carrying Amount   Unpaid Principal Balance   Associated Allowance 
   September 30, 2016   December 31, 2015   September 30, 2016   December 31, 2015   September 30, 2016   December 31, 2015 
  (In thousands) 
Originated    
Impaired loans without a valuation allowance:                              
Residential real estate  $969   $969   $969   $969   $-   $- 
Commercial real estate   3,202    4,291    3,202    4,291    -    - 
Home equity   263    422    272    424    -    - 
Commercial business   182    1,351    182    1,372    -    - 
Total impaired loans without a valuation allowance   4,616    7,033    4,625    7,056    -    - 
                               
Impaired loans with a valuation allowance:                              
Residential real estate   -    864    -    864    -    2 
Commercial real estate   482    -    482    -    2    - 
Commercial business   394    626    394    690    5    71 
Consumer   341    -    341    -    341    - 
Total impaired loans with a valuation allowance   1,217    1,490    1,217    1,554    348    73 
Total originated impaired loans  $5,833   $8,523   $5,842   $8,610   $348   $73 
                               
Acquired                              
Impaired loans without a valuation allowance:                              
Commercial real estate  $420   $611   $534   $678   $-   $- 
Home equity   454    197    462    200    -    - 
Commercial business   865    963    881    963    -    - 
Total impaired loans without a valuation allowance   1,739    1,771    1,877    1,841    -    - 
                               
Impaired loans with a valuation allowance:                              
Commercial Real Estate   143    151    143    151    7    12 
Commercial business   348    470    348    480    3    21 
Consumer   3    7    3    7    3    5 
Total impaired loans with a valuation allowance   494    628    494    638    13    38 
Total acquired impaired loans  $2,233   $2,399   $2,371   $2,479   $13   $38 

 

 30 

 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

  

The following table summarizes the average recorded investment balance of impaired loans and interest income recognized on impaired loans by portfolio segment as of September 30, 2016 and December 31, 2015:

 

   Average Recorded Investment   Interest Income Recognized 
   September 30, 2016   December 31, 2015   September 30, 2016   December 31, 2015 
   (In thousands) 
Originated                    
Impaired loans without a valuation allowance:                    
Residential real estate  $969   $973   $-   $27 
Commercial real estate   3,217    4,308    77    124 
Home equity   270    429    2    10 
Commercial business   216    1,374    10    49 
Total impaired loans without a valuation allowance   4,672    7,084    89    210 
                     
Impaired loans with a valuation allowance:                    
Residential real estate   -    864    -    28 
Commercial real estate   496    -    18    - 
Commercial business   431    673    17    34 
Consumer   343    -    -    - 
Total impaired loans with a valuation allowance   1,270    1,537    35    62 
Total originated impaired loans  $5,942   $8,621   $124   $272 
                     
Acquired                    
Impaired loans without a valuation allowance:                    
Commercial real estate  $442   $602   $-   $6 
Home equity   457    198    3    2 
Commercial business   914    999    32    54 
Total impaired loans without a valuation allowance   1,813    1,799    35    62 
                     
Impaired loans with a valuation allowance:                    
Commercial real estate   144    151    -    3 
Commercial business   361    506    16    14 
Consumer   3    7    1    1 
Total impaired loans with a valuation allowance   508    664    17    18 
Total acquired impaired loans  $2,321   $2,463   $52   $80 

 

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. Troubled debt restructurings are classified as impaired loans.

 

 31 

 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

  

If a performing loan is restructured into a TDR it remains in performing status. If a nonperforming loan is restructured into a TDR, it continues to be carried in nonaccrual status. Nonaccrual classification may be removed if the borrower demonstrates compliance with the modified terms for a minimum of six months.

 

The recorded investment in TDRs was $4.7 million at September 30, 2016 and $7.3 million at December 31, 2015.

 

The following tables present loans whose terms were modified as TDRs during the periods presented:

 

       Outstanding Recorded Investment 
   Number of Loans   Pre-Modification   Post-Modification 
(Dollars in thousands)  2016   2015   2016   2015   2016   2015 
Three Months Ended September 30,                              
Commercial real estate   -    -   $-   $-   $-   $- 
Commercial business   1    -    65    -    65    - 
Total   1    -   $65   $-   $65   $- 

 

       Outstanding Recorded Investment 
   Number of Loans   Pre-Modification   Post-Modification 
(Dollars in thousands)  2016   2015   2016   2015   2016   2015 
Nine Months Ended September 30,                              
Commercial real estate   -    3   $-   $4,044   $-   $4,044 
Commercial business   3    1    324    44    324    44 
Total   3    4   $324   $4,088   $324   $4,088 

 

All TDRs at September 30, 2016 and December 31, 2015 were performing in compliance with their modified terms, except for two non-accrual loans totaling $1.0 million at September 30, 2016 and two non-accrual loans totaling $1.1 million at December 31, 2015.

 

The following table provides information on how loans were modified as a TDR during the three and nine months ended September 30, 2016 and 2015.

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2016   2015   2016   2015 
   (In thousands)   (In thousands) 
Maturity/amortization concession  $-   $-   $-   $825 
Maturity concession   65    -    324    - 
Maturity and payment concession   -    -    -    3,263 
Total  $65   $-   $324   $4,088 

 

There were no loans modified in a troubled debt restructuring, for which there was a payment default during the three and nine months ended September 30, 2016 and 2015, respectively.

 

 32 

 

 

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.

 

Prior to the public offering, the Company issued shares in various offerings.

 

Preferred stock

 

In 2011, the Company elected to participate in the Treasurys Small Business Lending Fund Program (SBLF).

 

The Company sold 10,980 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series C, no par (the Series C Preferred Stock), having a liquidation preference of $1,000 per preferred share, to the Treasury. The transaction resulted in net capital proceeds to the Company of $5.9 million, of which at least 90% was invested in the Bank as Tier 1 Capital.

 

The Series C Preferred stock paid noncumulative dividends. The Company paid dividends at a rate of 1.0% since issuance.

 

On November 20, 2015 the Company redeemed the $10.98 million (10,980 shares) of preferred stock. The shares were redeemed at their liquidation value of $1,000 per share plus accrued dividends through November 20, 2015. The redemption was approved by the Companys primary federal regulator and was funded with the Companys surplus capital. With this redemption, the Company has redeemed all of its outstanding SBLF stock.

 

Warrants

 

Bank of New Canaans October 26, 2006 Stock Offering and the July 10, 2007 Private Placement (the Offerings) called for the issuance of Units. Each Unit issued pursuant to the Offerings represented one share of common stock and one nontransferable 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 extended the exercise period to October 5, 2015 through December 5, 2015. Each warrant allowed a holder to purchase .3221 shares of common stock at an exercise price of $14.00 per share. 945,789 Warrants were available to purchase up to 304,639 shares of common stock at $14.00 per share for a maximum offering of $4,264,946. As a result of the offering, 838,369 warrants were exercised for 269,992 shares of common stock for total gross proceeds of $3,779,888. There are no longer any outstanding warrants following the close of this offering.

 

As a result of the acquisition of Quinnipiac on October 1, 2014 the Company issued 68,600 warrants to former Quinnipiac warrant holders in accordance with the merger agreement. Each warrant was automatically converted into a warrant to purchase 0.56 shares of the Companys common stock for an exercise price of $17.86. None of the warrants have been exercised as of September 30, 2016. The warrants expire on March 6, 2018.

 

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Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

  

Dividends

 

The Companys shareholders are entitled to dividends when and if declared by the board of directors, out of funds legally available. The ability of the Company to pay dividends depends, in part, on the ability of the Bank to pay dividends to the Company. In accordance with Connecticut statutes, regulatory approval is required to pay dividends in excess of the Banks profits retained in the current year plus retained profits from the previous two years. The Bank is also prohibited from paying dividends that would reduce its capital ratios below minimum regulatory requirements.

 

On January 27, 2016 the Companys Board of Directors declared a $0.05 per share cash dividend, payable February 22, 2016 to shareholders of record on February 12, 2016. On April 27, 2016 the Companys Board of Directors declared a $0.05 per share cash dividend, payable May 26, 2016 to shareholders of record on May 16, 2016. On July 27, 2016 the Companys Board of Directors declared a $0.05 per share cash dividend, payable August 26, 2016 to shareholders of record on August 16, 2016. Subsequent to September 30, 2016, the Company’s Board of Directors declared a $0.07 per share cash dividend, payable November 28, 2016 to shareholders of record on November 18, 2016, representing a 40% increase when compared to the last quarter.

 

The Company did not repurchase any of its common stock during 2016 or 2015.

 

5.Comprehensive Income

 

Comprehensive income represents the sum of net income and items of other comprehensive income or loss, including net unrealized gains or losses on securities available for sale and net unrealized gains or losses on derivatives accounted for as cash flow hedges. The Companys total comprehensive income or loss for the three and nine months ended September 30, 2016 and 2015 is reported in the Consolidated Statements of Comprehensive Income.

 

The following tables present the changes in accumulated other comprehensive income (loss) by component, net of tax for the three and nine months ended September 30, 2016 and 2015:

 

   Net Unrealized Gain   Net Unrealized Gain     
   (Loss) on Available   (Loss) on Interest     
   for Sale Securities   Rate Swap   Total 
   (In thousands) 
Balance at June 30, 2016  $1,227   $(1,511)  (284)
Other comprehensive (loss) income before reclassifications   (241)   588    347 
Amounts reclassified from accumulated other comprehensive income   -    -    - 
Net other comprehensive (loss) income    (241)   588    347 
Balance at September 30, 2016  $986   $(923)  $63 

 

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Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

   Net Unrealized Gain   Net Unrealized Gain     
   (Loss) on Available   (Loss) on Interest     
   for Sale Securities   Rate Swap   Total 
   (In thousands) 
Balance at June 30, 2015  $368   $(255)  113 
Other comprehensive income (loss) before reclassifications   116    (504)   (388)
Amounts reclassified from accumulated other comprehensive income   -    -    - 
Net other comprehensive income (loss)   116    (504)   (388)
Balance at September 30, 2015  $484   $(759)  $(275)

 

   Net Unrealized Gain   Net Unrealized Gain     
   (Loss) on Available   (Loss) on Interest     
   for Sale Securities   Rate Swap   Total 
   (In thousands) 
Balance at December 31, 2015  $405   $(178)  227 
Other comprehensive income (loss) before reclassifications   673    (745)   (72)
Amounts reclassified from accumulated other comprehensive income   (92)   -    (92)
Net other comprehensive income (loss)   581    (745)   (164)
Balance at September 30, 2016  $986   $(923)  $63 

 

   Net Unrealized Gain   Net Unrealized Gain     
   (Loss) on Available   (Loss) on Interest     
   for Sale Securities   Rate Swap   Total 
   (In thousands) 
Balance at December 31, 2014  $644   $(113)  531 
Other comprehensive loss before reclassifications   (160)   (646)   (806)
Amounts reclassified from accumulated other comprehensive income   -    -    - 
Net other comprehensive loss   (160)   (646)   (806)
Balance at September 30, 2015  $484   $(759)  $(275)

 

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Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

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. Restricted stock awards include the right to receive non forfeitable dividends, and are therefore, considered to participate with common stock in undistributed earnings for purposes of computing EPS.

 

The Companys 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.

 

The following is a reconciliation of earnings available to common shareholders and basic weighted average common shares outstanding to diluted weighted average common shares outstanding, reflecting the application of the two-class method:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2016   2015   2016   2015 
   (In thousands, except per share data)   (In thousands, except per share data) 
Net income  $3,140   $2,253   $9,027   $6,412 
Preferred stock dividends   -    (27)   -    (82)
Dividends to participating securities   (6)   -    (18)   - 
Undistributed earnings allocated to participating securities   (56)   (63)   (155)   (170)
Net income for earnings per share calculation  $3,078   $2,163   $8,854   $6,160 
                     
Weighted average shares outstanding, basic   7,397    7,045    7,388    7,039 
Effect of dilutive equity-based awards   92    14    71    18 
Weighted average shares outstanding, diluted   7,489    7,059    7,459    7,057 
Net earnings per common share:                    
Basic earnings per common share  $0.42   $0.31   $1.20   $0.88 
Diluted earnings per common share   0.41    0.31    1.19    0.87 

 

7.Regulatory Matters

 

The Federal Reserve, the FDIC and the other federal and state bank regulatory agencies establish regulatory capital guidelines for U.S. banking organizations.

  

 36 

 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

 

As of January 1, 2015, the Company and the Bank became subject to new capital rules set forth by the Federal Reserve, the FDIC and the other federal and state bank regulatory agencies. The capital rules revise the banking agenciesleverage and risk-based capital requirements and the method for calculating risk weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act (the Basel III Capital Rules).

 

The Basel III Capital Rules establish a new minimum common equity Tier 1 capital requirement of 4.5% of risk-weighted assets; set the minimum leverage ratio at 4% of total assets; increased the minimum Tier 1 capital to risk-weighted assets requirement from 4% to 6%; and retained the minimum total capital to risk weighted assets requirement at 8.0%. A well-capitalizedinstitution must generally maintain capital ratios 100-200 basis points higher than the minimum guidelines.

 

The Basel III Capital Rules also change the risk weights assigned to certain assets. The Basel III Capital Rules assigned a higher risk weight (150%) to loans that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The Basel III Capital Rules also alter the risk weighting for other assets, including marketable equity securities that are risk weighted generally at 300%. The Basel III Capital Rules require certain components of accumulated other comprehensive income (loss) to be included for purposes of calculating regulatory capital requirements unless a one-time opt-out is exercised. The Bank did exercise its opt-out option and will exclude the unrealized gain (loss) on investment securities component of accumulated other comprehensive income (loss) from regulatory capital.

 

The Basel III Capital Rules limit a banking organizations capital distributions and certain discretionary bonus payments to executive officers if the banking organization does not hold a capital conservation buffer consisting of 2.5% of regulatory risk based capital ratios in addition to the amount necessary to meet its minimum risk-based capital requirements. The required minimum conservation buffer began to be phased in incrementally, starting at 0.625% on January 1, 2016 and will increase to 1.25% on January 1, 2017, 1.875% on January 1, 2018 and 2.5% on January 1, 2019.

 

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 Companys consolidated financial statements.

 

Management believes, as of September 30, 2016, the Bank and Company meet all capital adequacy requirements to which they are subject and satisfies the criteria for a well capitalizedinstitution. There are no conditions or events since then that management believes have changed this conclusion.

 

 37 

 

 

Bankwell Financial Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

  

The capital amounts and ratios for the Bank and the Company at September 30, 2016 and December 31, 2015 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                              
September 30, 2016                              
Common Equity Tier 1 Capital to Risk-Weighted Assets  $153,398    11.64%  59,309    4.50%  $85,669    6.50%
Total Capital to Risk-Weighted Assets   169,886    12.89%   105,439    8.00%   131,799    10.00%
Tier I Capital to Risk-Weighted Assets   153,398    11.64%   79,079    6.00%   105,439    8.00%
Tier I Capital to Average Assets   153,398    10.45%   58,706    4.00%   73,383    5.00%
Bankwell Financial Group, Inc.                              
September 30, 2016                              
Common Equity Tier 1 Capital to Risk-Weighted Assets  $136,858    10.34%  59,538    4.50%   N/A    N/A 
Total Capital to Risk-Weighted Assets   178,447    13.49%   105,845    8.00%   N/A    N/A 
Tier I Capital to Risk-Weighted Assets   136,858    10.34%   79,384    6.00%   N/A    N/A 
Tier I Capital to Average Assets   136,858    9.14%   59,908    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, 2015                              
Common Equity Tier 1 Capital to Risk-Weighted Assets  $142,651    12.18%  52,709    4.50%  $76,135    6.50%
Total Capital to Risk-Weighted Assets   156,820    13.39%   93,705    8.00%   117,131    10.00%
Tier I Capital to Risk-Weighted Assets   142,651    12.18%   70,279    6.00%   93,705    8.00%
Tier I Capital to Average Assets   142,651    10.84%   52,620    4.00%   65,775    5.00%
Bankwell Financial Group, Inc.                              
December 31, 2015                              
Common Equity Tier 1 Capital to Risk-Weighted Assets  $128,692    10.92%   $53,052    4.50%   N/A    N/A 
Total Capital to Risk-Weighted Assets   167,867    14.24%   94,315    8.00%   N/A    N/A