Annual Report 2014
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Bank smart.
Bank local.
Bank well.
220 Elm Street, New Canaan, CT 06840
Bankwell is a member of the FDIC and an Equal Housing Lender. This statement has not been
reviewed for accuracy or relevance by the Federal Deposit Insurance Corporation.
Bankwell Financial Group is the bank holding company of its wholly owned subsidiary,
Bankwell Bank. Bankwell is a community bank with 9 branches and a loan production office
that serves the banking and lending needs of residents and businesses throughout Connecti-
cut. We pride ourselves on our unique ability to provide customers with a hometown, private
banking experience, and the products and technology that meet their everyday needs. Our
mission remains the same after 12 years: to provide outstanding personal service and add
value to each of the communities we serve.
Assets (in thousands)
Bank well throug h the y ears
$1,099,531
$779,618
$190,906
$247,041
$395,708
$0
2002
2007
2008
2010
2013
2014
Founded the
hometown bank,
The Bank of
New Canaan
Holding Company
formed (BNC
Financial Group)
A second
hometown bank,
The Bank of
Fairfield, is founded
A third hometown bank,
Stamford First Bank,
is founded (as a division
of The Bank of New
Canaan)
The Banks merge
into “Bankwell”
Bankwell acquires
The Wilton Bank
Bankwell acquires
Quinnipiac Bank &
Trust Company
CORP ORATE INFORMATION
Shareholders
For help in transferring ownership, address changes, or lost or stolen stock certificates, please contact:
Computershare
480 Washington Blvd. 29th Floor
Jersey City, NJ 07310
(800) 368-5948
www.computershare.com
Stock Symbols
BWFG – Common Stock
Stock Quotes
www.nasdaq.com
Shareholder Contact
Bankwell Financial Group, Inc.
Mr. Christopher Gruseke or Mr. Ernest J. Verrico, Sr.
220 Elm Street
New Canaan, CT 06840
(203) 652-0166
Auditors
Whittlesey & Hadley, P.C.
280 Trumbull Street, 24th Floor, Hartford, CT 06103
Corporate Counsel
Hinkley, Allen & Snyder, LLP
20 Church Street, Hartford, CT 06103
Elm Street Branch
208 Elm Street
New Canaan, CT 06840
(203) 972-3838
Sasco Hill Branch
One Sasco Hill
Fairfield, CT 06824
(203) 659-7600
Hamden Branch
2704 Dixwell Avenue
Hamden, CT 06518
(203) 407-0756
Executive Office
220 Elm Street
New Canaan, CT 06840
(203) 652-0166
Locations
Cherry Street Branch
156 Cherry Street
New Canaan, CT 06840
(203) 966-7080
Black Rock Branch
2220 Black Rock Turnpike
Fairfield, CT 06825
(203) 659-7610
Wilton Branch
47 Old Ridgefield Road
Wilton, CT 06897
(203) 762-2265
Loan Production Office
855 Main Street, Suite 700
Bridgeport, CT 06604
(203) 683-6363
Stamford Branch
612 Bedford Street
Stamford, CT 06901
(203) 391-5777
North Haven Branch
24 Washington Avenue
North Haven, CT 06473
(475) 238-6807
Norwalk Branch
370 Westport Avenue
Norwalk, CT 06851
(203) 663-0480
This annual report may include forward-looking statements by the Company that are within the protection of the Private Securities Litigation Reform Act of 1995. Such statements are
based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties that could cause our actual results to differ materially from
those set forth in such forward-looking statements. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Words such as
“believes,” “anticipates,” “expects,” “intends,” “plans,” “estimates,” “targeted” and similar expressions, and future or conditional verbs, such as “will,” “would,” “should,” “could” or “may”
are intended to identify forward-looking statements but are not the only means to identify these statements. Factors that could cause differences in actual results may be beyond our
control —Any forward-looking statements made by or on behalf of us in this report speak only as of its date, and we do not undertake to update forward-looking statements to reflect
the impact of circumstances or events that arise after that date.
TO OUR CLIENTS AND SHAREHOLDERS
2014 was a defining year for Bankwell Financial Group. The Company
experienced another consecutive year of record core earnings, as we
surpassed $1 billion in total assets. In May, we successfully completed our IPO, raising
approximately $45 million in equity capital, and in October, we utilized a portion of that
capital to fund our growth through our second acquisition, merging with Quinnipiac
Bank & Trust Company.
Our core net income reached $5.8 million in 2014, a 44%
increase over a year ago. Our record performance reflected a
continuation of our strong momentum as we held stead-
fast to our strategic plan, which focuses on growing the
Company’s profitability through organic growth and acquisi-
tions, diversifying revenue streams and investing in new and
profitable lines of business.
In 2014, we excelled in virtually all aspects of our business,
as evidenced by solid returns, steady growth and consistent
performance on both sides of the balance sheet. Loans totaled
$929.8 million at year-end, a 47.1% increase year over year,
while our credit quality remained an industry standout, with
non-performing assets as a percentage of total assets totaling
0.39% at year-end. Deposits grew 26.3% to $835.4 million,
and our net interest margin was 3.84%, ranking us among the
leading banks in our high performing peer group.
Once again this year, as reported in the FDIC’s annual
deposit market share report, Bankwell grew market share
Blake Drexler
Chairman
Christopher Gruseke
President & Chief Executive Officer
“Once again this year,
as reported in the
FDIC’s annual deposit
market share report,
Bankwell grew market
share in every
community we serve.”
in every community we
serve. We attribute this per-
“relationship banking” that rewards customers with multiple
formance to our focus on a
benefits when they do more of their banking with us, and
hometown, private banking
mobile banking for added convenience. We also launched a
style model and our ability
to adapt our services to meet
full suite of cash management services for businesses. These
products and services reinforce the way Bankwell is uniquely
the changing needs of our
positioned as a high touch community bank committed to
customers.
providing customers with the product depth and technology
We are especially proud of
that rival that of larger banks.
what we accomplished
in
In addition to steady organic growth, we remain focused on
2014 because the results reflect the way in which we con-
strategic acquisitions in attractive markets. The merger with
tinued to help our customers. We stand by our mission,
which has always been at the core of everything we do: to
provide our customers with the best possible service and to
give back to the communities we serve. As part of our ongo-
ing efforts to enhance the Bankwell customer experience,
Quinnipiac Bank & Trust Company, a like-minded bank with
an excellent reputation, has provided us with the opportunity
to take our proven model to New Haven County. With greater
lending resources and an experienced team, which is known
and respected locally, we look forward to expanding our pres-
we launched several new products and services, including
ence in that market.
Continued >
2014 has been a year of change, but thanks to a strong
In 2014, we saw three of our longtime directors — Hugh
vision, a clear strategy, ambitious financial targets and a
Halsell, Jay Forgotson and Mark Fitzgibbon — retire from
commitment to our community bank model, we believe that
our board. Through their expertise and dedication, each
our market presence will continue to grow. Our strategy is
of these directors has played an important role in the
“Our strategy is to
continue to enhance
our relationship-based
model and take
advantage of our
strong position in
areas that have high
growth potential.”
to continue to enhance our
Bank’s transformation over the years, and we are grate-
relationship-based model
ful for their significant contribution to our success.
and take advantage of our
We in turn welcomed Michael Brandt and Ray Palumbo, a
strong position in areas that
former director of Quinnipiac Bank & Trust Company, who
have high growth potential.
both joined our board in the second half of 2014. We feel very
At the same time, we are
fortunate to have each of these new directors on our team as
committed to strengthen-
we continue to grow and expand our presence in new markets.
ing and enhancing all as-
In light of this excellent year, I would like to thank our cus-
pects of our infrastructure.
tomers, our directors and shareholders, and the communities
To help us continue our
we serve for their continued confidence and support. I would
trajectory of growth and
also like to thank our strong Management Team and our
profitability, we recently hired a founding investor and for-
valued staff, on whom we depend each day for our ongoing
mer director of the Bank, Christopher Gruseke, to assume the
success.
role of President and CEO of Bankwell Financial Group. We
are very excited to have someone of Chris’ caliber joining our
Sincerely
Management Team in a leadership role, and I am confident
that his experience and expertise will contribute significant-
ly to our continued growth and profitability. Having served
as Executive Chairman on an interim basis over the last few
Blake S. Drexler
Chairman
months, I recently resumed my role as Chairman of the Board.
Diane Knetzger, Ernest J. Verrico, Sr., Christopher Gruseke, Christine Chivily,Gail E.D. Brathwaite, Michele A. Johnson, Blake Drexler (Chairman),
Heidi S. DeWyngaert and Mark A. Candido (left to right)
BANKWELL FINANCIAL GROUP
Executive Management Team
Christopher Gruseke
President &
Chief Executive Officer
Ernest J. Verrico, Sr.
Executive Vice President,
Chief Financial Officer,
Assistant Corporate Secretary
Heidi S. DeWyngaert
Executive Vice President,
Chief Lending Officer
Gail E.D. Brathwaite
Executive Vice President,
Chief Operating Officer
Christine Chivily
Senior Vice President,
Chief Credit Officer
Mark A. Candido
Senior Vice President,
New Haven Regional
President
Michele A. Johnson
Senior Vice President,
Chief Risk Officer
Diane Knetzger
Senior Vice President,
Director of Marketing
Board of Directors
Blake Drexler
Chairman
Partner
Five Mile Ventures
Rowayton, CT
James Fieber
Vice Chairman
Managing Member
Fieber Group, LLC;
Managing Partner
FIEBRO Acquisitions, LLC
New Canaan, CT
Frederick Afragola
Chairman Emeritus
Founder
Frame Advisors
New Canaan, CT
George Bauer
Chairman & CEO
GPB Group, Ltd.
Wilton, CT
Michael Brandt
Senior Vice President &
Chief Financial Officer
Prudential Retirement
Hartford, CT
Richard Castiglioni
Partner
Diserio Martin O’Connor
and Castiglioni, LLP
Stamford, CT
Eric Dale
Partner
Robinson & Cole, LLP
Stamford, CT
William J. Fitzpatrick, III
Member
Fitzpatrick, Fray &
Bologna, LLC
Fairfield, CT
Daniel S. Jones
President
NewsBank, Inc.
New Canaan, CT
Carl R. Kuehner
Chairman & CEO
Building and Land
Technology Corp.
Norwalk, CT
Todd H. Lampert
Managing Member
Lampert, Toohey &
Rucci, LLC;
Managing Member
Main Street Group, LLC
New Canaan, CT
Victor Liss
Retired
Stratford, CT
Ray Palumbo
President & CEO
Underwater Construction
Company
Essex, CT
BANKWELL FINANCIAL GROUP FINANCIAL HIGHLIGHTS
(dollars in 000’s except per share data)
2014
December 31,
2013
2012
2011
2010
STATEMENT OF CONDITION
Total assets
Gross portfolio loans
Investment securities
Deposits
Borrowings
Total equity
STATEMENT OF INCOME AND EXPENSE
Interest income
Interest expense
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income before income tax
Net income
Basic earnings per share
Diluted earnings per share
FINANCIAL RATIOS
Tier 1 capital to average assets1
Bankwell Bank
The Bank of New Canaan
The Bank of Fairfield
Tier 1 capital to risk-weighted assets1
Bankwell Bank
The Bank of New Canaan
The Bank of Fairfield
Total capital to risk-weighted assets1
Bankwell Bank
The Bank of New Canaan
The Bank of Fairfield
Net interest margin
Return on average assets
Return on average shareholders’ equity
Allowance for loan losses to total loans
Nonperforming assets to total assets
$1,099,531
$779,618
$610,016
$477,355
$395,708
929,762
76,463
835,439
129,000
129,210
632,012
42,413
661,545
44,000
69,485
530,050
369,294
46,412
462,081
91,000
51,534
94,972
367,115
58,000
49,188
288,425
58,152
309,137
44,000
40,354
$35,589
$28,092
$24,397
$20,587
$16,877
3,929
31,660
2,152
3,041
25,812
6,737
4,568
0.78
0.78
2,765
25,327
585
4,723
3,192
21,205
1,821
345
22,120
17,858
7,345
5,161
1.46
1.44
1,871
1,214
0.39
0.38
11.12 %
7.91%
–
–
–
–
12.47%
9.49%
–
–
–
–
13.55%
10.74%
–
–
3.84%
0.52%
4.66%
1.17%
0.39%
–
–
3.94%
0.77%
8.17%
1.33%
0.23%
–
7.88%
8.39%
–
9.09%
10.80%
–
10.34%
12.05%
4.11%
0.22%
2.40%
1.50%
0.81%
2,870
17,717
1,049
1,134
14,601
3,201
2,204
0.72
0.71
–
8.71 %
11.30%
–
11.07%
13.66%
–
12.33%
14.91%
4.27%
0.50%
5.03%
1.74%
0.78%
3,209
13,668
1,311
1,695
13,331
721
507
0.10
0.09
–
8.15%
13.25%
–
11.86%
16.41%
–
13.12%
17.10%
4.12%
0.14%
1.33%
1.87%
0.57%
1Represents bank ratios. During 2013, The Bank of New Canaan and The Bank of Fairfield were merged into Bankwell Bank.
thrive
Wallingford YMCA
“The YMCA is all about teamwork, and Bankwell is a partner that always has you covered. Whether it’s financing, managing
our business accounts or supporting the YMCA throughout the community, they always look out for our best interests.”
– S E A N D O H E R T Y , E X E C U T I V E D I R E C T O R
build
The HB Nitkin Group
Helen Nitkin with Craig Way (center) and Jeffrey Ulman
“We chose Bankwell because they are a very relationship-oriented bank. It’s gratifying to be able to deal face to face
with local decision-makers…and a bank that plays a vital role in the community.”
– H E L E N N I T K I N , C E O
2014 OVERVIEW
Financial Results
Bankwell Financial Group had an outstanding year in 2014. We continued our success-
ful earnings trend with net income of $4.6 million at December 31, 2014. Excluding
merger-related expenses, net income (core earnings) for the year was a record $5.8
million. Additionally, the Company reached record asset levels at $1.1 billion,
increasing 41% over assets of $780 million at December 31, 2013, largely fueled by
strong loan growth and the acquisition of Quinnipiac Bank & Trust Company.
We continued to generate strong, steady revenue
occurred across multiple portfolios, including commercial
growth, reflecting the strength of our business model. In
loans, mortgages, construction loans and residential mort-
2014, revenues totaled $34.7 million, up 15.5% over 2013.
gages. Credit quality remained exceptionally strong, with
The strong improvement in net interest income was the
non-performing assets as a per-
result of record earning asset growth and an outstanding net
centage of total assets totaling
interest margin of 3.84% for the year.
0.39% at year-end. We are fully
Core Earnings
Reflecting our commitment to local businesses, Bankwell
aware that a critical component
saw significant loan growth in 2014, ending the year at
of our overall success is our
$929.8 million, a 47% increase over 2013. Loan growth
excellent asset quality, and we
are committed to maintaining
that standard through strong
underwriting and vigilant credit
management.
s
d
n
a
s
u
o
h
t
n
i
s
r
a
l
l
o
D
$1,226
$5,757
$4,000
2012
2013
2014
Deposit growth also saw a
Asset Growth
strong finish to the year, total-
ing $835.4 million at Decem-
ber 31, 2014, a 26% increase
over 2013, with core deposits
up 13% to $526.6 million.
The combination of low
interest rates, increased regu-
latory controls, changing con-
s
d
n
a
s
u
o
h
t
n
i
s
r
a
l
l
o
D
$1,099,531
$779,618
$610,016
2012
2013
2014
sumer behavior and new automated banking options have
put increased pressure on the traditional banking model, and
we are constantly evaluating the most efficient and effective
way to provide the greatest value to our customers. To that
end, we manage expenses so that every dollar we spend is
aligned with our priorities and our vision. As a result of this
rigorous approach to increased productivity and expense
management, our efficiency ratio improved from 75.7% in
2013 to 69.1% in 2014.
Continued >
Cynthia Gorey with Leo Karl, Board President
“Bankwell exemplifies the spirit of community
banking. We are very grateful for their continued
collaboration in our charitable efforts.”
– CYNTHIA GOR EY, EX ECU TI VE D I RE C TO R
NEW CANAAN C OMMUN ITY F O UN D ATI O N
Capital Growth
In May 2014, Bankwell Financial Group completed an Initial
Public Offering (IPO) that raised approximately $45 million
net in capital to help fund our future growth. On June 5th, we
celebrated this watershed with the traditional “ringing of the
bell” at NASDAQ. This was a major milestone for the Compa-
ny, and the capital raise ensured that we continue to be well
capitalized and positioned to target strategic acquisitions in
favorable geographic areas.
At year-end, our sharehold-
47.11%
ers’ equity remained strong at
Loan Growth
43.53%
19.24%
2012
2013
2014
Deposit Growth
$662
$462
s
n
o
i
l
l
i
m
n
i
s
r
a
l
l
o
D
2012
2013
2014
■ Checking
■ Savings
■ Money Market
■ Time Deposit
$129.2 million, an increase
of $59.7 million from year-
end 2013, primarily a result
of proceeds from the IPO and
shares issued as a result of the
Quinnipiac Bank acquisition,
coupled with net income of
$4.6 million. As of December
31, 2014, tangible common
value per share were 10.47%
and $16.35, respectively.
Focus on Profitable
Growth
The completion of our acqui-
sition of Quinnipiac Bank in
$835
equity ratio and tangible book
“As a local business that cares about customers and
the community, I chose a bank right from the start
that does the same. Bankwell is there for me when
I need them, and they go the extra mile to support
what’s important in town.”
– DOUG ZUMB ACH , OW NER, Z UMB ACH ’S G OU RMET
COFF EE & FOU NDER , CAFFEI NE & CAR BUR ETO RS,
NE W CAN AAN, CT
Investing in our Franchise
People and Capabilities
October marked our foray
We strive to provide our customers with a consistent, value-
into New Haven County. The merger provided us with
added experience each time they interact with us, wheth-
a foothold to take our proven community bank model
to another attractive market. Quinnipiac Bank had a sim-
er it’s in person, by phone, at one of our ATMs, online, or
through a mobile device. Regardless of the channel our
ilar mission and hometown banking model, and we are
customers choose, our focus is to deliver exceptional service
focused on introducing our brand to the New Haven
every time. We know that outstanding customer experiences
market, so that businesses and residents there can benefit
lead to expanded and new opportunities.
from all we have to offer.
In 2014, we introduced a sophisticated new product set,
As the model for bank branches continues to evolve, we
including a suite of cash management services for businesses,
took steps to enhance our retail “store” space while maximiz-
and “relationship banking” that rewards retail custom-
ing the customer experience. In early 2014, we relocated our
ers with higher savings and money market rates, free ATM
two Fairfield branches to new locations that provide custom-
banking throughout the U.S., free fraud repair and restoration
ers with enhanced facilities, improved parking and drive-up
services, and exclusive travel discounts and amenities. We
convenience. In March 2015, we opened a Norwalk branch
also launched mobile banking, including mobile check deposit.
that complements our existing branch network and our over-
Continued >
all plan for strategic expansion.
grow
Girl Scouts of Connecticut, Wilton Ser vice Unit
Troop 50425 at Bankwell’s Wilton Branch
“We have more than 30 Girl Scout accounts at Bankwell and the experience has been terrific. Bankwell makes
our business banking easy for new leaders, so they can focus their time and energy on our girls. We’re glad
to be affiliated with a financial institution that shares our values of giving back to the community.”
– K A R E N B A S L E R , W I L T O N S E R V I C E U N I T T R E A S U R E R , G I R L S C O U T S O F C O N N E C T I C U T
produce
Main Enterprises, Inc.
“A family business since 1919, Main Enterprises is now one of the largest mechanical contracting companies in Connecticut to
produce, install and service commercial heating and air conditioning systems. From financing to help us grow to cash management
services that make us more efficient, Bankwell combines exceptional personal service with the horsepower we need.”
– K E N O P P E D I S A N O , C E O
We continued to improve our operational efficiency, in-
vesting in talent and technology that support our vision and
further develop internal synergies while maintaining consistent
vigilance about risk control. Our success depends upon the
efficient execution of our strategy, and our well trained staff
is committed to delivering the highest standard of excellence
to our customers, shareholders and the communities we serve.
Commitment to Community
As a community bank, what we represent is reflected less
by what we say than by what we do. We work hard to make
a difference every day, providing mentoring, volunteer-
ing or financial support to numerous organizations across
Connecticut. That difference might take the form of financing
the expansion of a local business, helping someone construct
their dream home, or working with a customer to build a
retirement plan. It might be providing a financial education
seminar to a local youth group, featuring a local artist in our
branch or supporting a local food drive.
The differences we make are founded on relationships
we foster with people and organizations in each of our
communities. We believe it’s this connection, along with
our strong set of values, that sets us apart from other
financial institutions. It’s the relationships that motivate
us each and every day to do our best to help our communi-
ties thrive.
Kids Helping Kids teens at Inspirica in Stamford
“Bankwell supported Kids Helping Kids when
we were just getting off the ground as a local
not-for-profit focused on creating a platform
for children and teens to help other children in
need. 59 schools and 15 towns later, Bankwell
is just as strong and loyal a business and
community partner as ever. We know we can
count on them every step of the way.”
– JENN IFER KELLEY, EXECUTI VE DIR ECTOR
KIDS HELP ING KIDS
ST AMFORD, CT
Revenue
Net Interest Margin
NPA/Total Assets
$34,701
$30,050
3.84%
0.99%
1.09%
3.56%
3.34%
0.39%
$21,550
s
d
n
a
s
u
o
h
t
n
i
s
r
a
l
l
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D
2012
2013
2014
■ Net Interest Income ■ Fee Income
Bankwell
12/31/14
Regional
Performers
*
Regional
High Performers
**
Bankwell
12/31/14
Regional
Performers
*
Regional
High Performers
**
*Regional Peer Group includes all publicly traded banks and bank holding companies with total assets between $500 million and $2 billion (as of 9/30/2014) headquartered in the states of CT, MA, NJ, NY, and RI.
**Regional High Performers peer group includes those members of the Regional Peer Group that also fell within the 75th percentile in terms of return on average equity for the nine months-ended 9/30/2014.
expand
Garelick & Herbs
“Bankwell helped us acquire property, build additional stores and expand our catering business throughout Fairfield County. We
switched to Bankwell because we wanted a local banking relationship and the ability to deal with decision makers at the Bank.”
– J A S O N & P A U L A G A R E L I C K , O W N E R S
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
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
(State or other jurisdiction of
Incorporation or organization)
20-8251355
(I.R.S. Employer
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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐ Yes ☑ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
☐ Yes ☑ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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). ☑ Yes ☐ No
Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K (§ 229.405 of this chapter)
is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ☑
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)
Accelerated filer ☑
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 ☑ No
Aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2014 based on the closing
price of the common stock as reported on the NASDAQ Global Market: $79,901,394
As of February 28, 2015, there were 7,243,252 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement for its Annual Meeting of Stockholders, expected to be filed pursuant to
Regulation 14A within 120 days after the end of the 2014 fiscal year, are incorporated by reference into Part III of this report
on Form 10-K
Bankwell Financial Group, Inc.
Form 10-K
Table of Contents
PART I
Item 1. Business
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2. Properties
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . .
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . .
Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
23
35
35
35
35
36
37
41
72
75
130
130
130
131
131
131
131
131
PART IV
Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
132
133
i
BANKWELL FINANCIAL GROUP, INC.
FORM 10-K
PART 1
Item 1. Business
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933 or the Securities Act, and Section 21E of the Exchange Act. These statements are often, but not
always, made with the words or phrases such as “may,” “should,” “believe,” “likely result in,” “expect,”
“would” “intend,” “could,” “predict,” “potential,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “plan,”
“projection,” and “outlook” or the negative version of those words or other similar words of a forward-looking
nature. These forward-looking statements are not historical facts, and are based on current expectations,
estimates and projections about our industry, management’s beliefs and certain assumptions made by
management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we
caution you that any such forward-looking statements are not guarantees of future performance and are subject
to risks, assumptions, uncertainties and other factors that could cause the actual results to differ materially
from those contemplated by these forward-looking statements. Important factors that may cause actual results
to differ from those contemplated by these forward-looking statements include, but are not limited to, those
disclosed under “Risk Factors” in Part I Item 1A as well as the following factors:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
local, regional and national business or economic conditions may differ from those expected;
we are subject to credit risk and could incur losses in our loan portfolio;
our allowance for loan losses may not be adequate to absorb loan losses;
changes in real estate values could also increase our credit risk;
we could experience changes in our key management personnel;
we may not be able to successfully execute our management team’s strategic initiatives;
our ability to successfully execute our growth initiatives such as branch openings and acquisitions;
volatility and direction of market interest rates;
increased competition within our market area may limit our growth and profitability;
economic, market, operational, liquidity, credit and interest rate risks associated with our business;
the effects of and changes in trade, monetary and fiscal policies and laws, including the Federal
Reserve Board’s interest rate policies;
changes in accounting policies and practices, as may be adopted by regulatory agencies, the Public
Accounting Oversight Board or the Financial Accounting Standards Board;
changes in law and regulatory requirements (including those concerning taxes, banking, securities
and insurance);
further governmental intervention in the U.S. financial system; and
difficulties and delays in integrating Quinnipiac Bank and Trust Company.
The foregoing factors should not be construed as exhaustive. If one or more events related to these or other
risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may
differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such
forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and
we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a
result of new information, future developments or otherwise. New factors emerge from time to time, and it is
1
not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our
business or the extent to which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
General
Bankwell Financial Group, Inc. (the Company, we, our, us) is a bank holding company, headquartered
in New Canaan, Connecticut and offers a broad range of financial services through our banking subsidiary,
Bankwell Bank (the Bank), a Connecticut state non-member bank founded in 2002. Our primary market is
the greater Fairfield County, Connecticut area, which we serve from our main banking office located in
New Canaan, Connecticut and six other branch offices located throughout the Fairfield County area. In
addition, two additional branches were added as a result of the merger with Quinnipiac Bank and Trust
Company (“Quinnipiac”) in the fourth quarter of 2014 located in New Haven County, Connecticut. On
March 1, 2015 the Company opened a branch in Norwalk, Connecticut. As of December 31, 2014, on a
consolidated basis, we had total assets of approximately $1.1 billion, net loans of approximately $916.0
million, total deposits of approximately $835.4 million, and shareholders’ equity of approximately $129.2
million.
We are committed to becoming the premier “Hometown” bank in Fairfield and New Haven Counties
and surrounding areas. We believe that our market exhibits highly attractive demographic attributes and
presents favorable competitive dynamics, thereby offering long-term opportunities for growth. We have a
history of building long-term customer relationships and attracting new customers through what we believe
is our superior customer service and our ability to deliver a diverse product offering. In addition, we believe
that our strong capital position and extensive local ownership, coupled with a highly respected and
experienced executive management team and board of directors, give us credibility with our customers and
potential customers in our market. Our focus is on building a franchise with meaningful market share and
consistent revenue growth complemented by operational efficiencies that we believe will produce attractive
risk-adjusted returns for our shareholders.
On May 15, 2014, Bankwell Financial Group, Inc. priced 2,702,703 common shares in its IPO at
$18.00 per share, and on May 15, 2014, Bankwell common shares began trading on the Nasdaq Stock
Market. The net proceeds from the IPO were approximately $44.7 million, after deducting the underwriting
discount of approximately $2.5 million and approximately $1.3 million of expenses.
Our History and Growth
Bankwell Bank was originally chartered as two separate banks, The Bank of New Canaan (including a
separate division, Stamford First Bank) and The Bank of Fairfield, which were subsequently merged and
rebranded as “Bankwell Bank”. It was chartered with a commitment to building the premier community
bank in the market we serve. We began operations in April 2002 with an initial capitalization of $8.6
million. On November 5, 2013, we acquired The Wilton Bank, and it was merged into Bankwell Bank. On
October 1, 2014, we acquired Quinnipiac Bank and Trust Company and it was merged into Bankwell Bank.
With the efforts of our strong management team, we continued our growth and maintained a strong
track record of performance. From December 31, 2009 through December 31, 2014, our total assets grew
from $328.2 million to approximately $1.1 billion; our loans outstanding grew from $252.8 million to
approximately $916.0 million and our noninterest bearing deposits grew from $42.9 million to
approximately $166.0 million. We believe this growth was driven by our ability to provide superior service to
our customers and our financial stability. This loan growth was achieved while maintaining our focus on
our strong underwriting standards, which has been reflected in our low net charge-off levels.
Business Strategy
We are focused on becoming the “Hometown” bank and banking provider of choice in our highly
attractive market area through:
•
Responsive, Customer-Centric Products and Services and a Community Focus. We offer a broad
array of products and services which we customize to allow us to focus on building long-term
relationships with our customers through high-quality, responsive and personal customer service.
2
•
•
•
By focusing on the entire customer relationship, we build the trust of our customers which leads
to long-term relationships and generates our organic growth. In addition, we are committed to
meeting the needs of the communities that we serve. Our employees are involved in many civic and
community organizations which we support through sponsorships. As a result, customers and
potential customers within our market know about us and frequently interact with our employees
which allows us to develop long-term customer relationships without extensive advertising.
Strategic Acquisitions. To complement our organic growth, we focus on strategic acquisitions in
or around our existing markets that further our objectives. We believe there are many banking
institutions that continue to face credit challenges, capital constraints and liquidity issues and that
lack the scale and management expertise to manage the increasing regulatory burden and will
likely need to partner with an institution like ours. On March 31, 2014, we entered into a merger
agreement with Quinnipiac. Quinnipiac had one branch located in Hamden, Connecticut and a
second branch in the neighboring town of North Haven. The transaction closed on October 1,
2014 and Quinnipiac merged with and into Bankwell Bank. As we evaluate potential acquisitions,
we will continue to seek acquisitions that provide meaningful financial benefits, long-term organic
growth opportunities and expense reductions, without compromising our risk profile.
Utilization of Efficient and Scalable Infrastructure. We employ a systematic and calculated
approach to increasing our profitability and improving our efficiencies. We recently upgraded our
operating infrastructure particularly in the areas of technology, data processing, compliance and
personnel. We believe that our scalable infrastructure provides us with an efficient operating
platform from which to grow in the near term, and without incurring significant incremental
noninterest expenses, while continuing to deliver our high-quality, responsive customer service,
which will enhance our ability to grow and increase our returns.
Disciplined Focus on Risk Management. Effective risk management is a key component of our
strong corporate culture. We use our strong risk management infrastructure to monitor our
existing loan and investment securities portfolios, support operational decision-making and
improve our ability to generate earning assets with strong credit quality. To maintain our strong
credit quality, we use a comprehensive underwriting process and we seek to maintain a diversified
loan portfolio and a conservative investment securities portfolio. Board-approved policies contain
approval authorities, as appropriate, and are reviewed at least annually. We have a Risk
Management Steering Committee comprised of executive officers who oversee new business
initiatives and other activities that warrant oversight of risk and related mitigants. Internal review
procedures are performed regarding anti-money laundering and consumer
compliance
requirements. Our Chief Risk Officer reports directly to the Chair of our Audit Committee.
Our Competitive Strengths
We believe that we are especially well-positioned to create value for our shareholders as a result of the
following competitive strengths:
•
•
the second most affluent metropolitan statistical area in the United States,
Our Market. Our current market has been defined as the greater Fairfield County area, which is
part of
the
Bridgeport-Stamford-Norwalk, Connecticut MSA, according to the U.S. Department of
Commerce. In addition, our current market has expanded to New Haven County Connecticut
with the acquisition of Quinnipiac. The Stamford market area includes numerous affluent
suburban communities of professionals who work and commute into New York City,
approximately 50 miles from our headquarters, and many small to mid-sized businesses which
support these communities. Fairfield County is the wealthiest county in Connecticut, with a
2009 – 2013 median household income of $82,283 according to estimates from United States
Census Bureau. We believe that this market has economic and competitive dynamics that are
favorable to executing our growth strategy.
Experienced and Respected Management Team with a Proven and Successful Track Record. Our
executive management team, is comprised of seasoned professionals with significant banking
experience, a history of high performance at local financial institutions and success in identifying,
3
acquiring and integrating financial
team includes
institutions. Our
Christopher Gruseke, Chief Executive Officer (since February 2015) Heidi S. DeWyngaert,
Executive Vice President, Chief Lending Officer (ten years with us), Ernest J. Verrico, Sr.,
Executive Vice President, Chief Financial Officer (five years with us), Gail E.D. Brathwaite,
Executive Vice President, Chief Operating Officer (two years with us), Diane Knetzger, Senior
Vice President, Director of Marketing (ten years with us), Christine A. Chivily, Senior Vice
President and Chief Credit Officer (two years with us) and Michele Johnson, Senior Vice
President and Chief Risk Officer (six years with us).
senior management
Dedicated Board of Directors with Strong Community Involvement. Our board of directors is
comprised of a group of local business leaders who understand the need for strong community
banks that focus on serving the financial needs of their customers. One of our directors, Frederick
R. Afragola was instrumental in our organization and growth. Mr. Afragola was the Chief
Executive Officer and President of The Bank of New Canaan from its opening in 2002 until his
retirement in 2008 and played an integral role in building our foundation and guiding our growth.
The interests of our executive management team and directors are aligned with those of our
shareholders through common stock ownership. By capitalizing on the close community ties and
business relationships of our executive management team and directors, we are positioned to
continue taking advantage of the market opportunity present in our primary market.
Strong Capital Position. At December 31, 2014, we had a 10.47% tangible common equity ratio,
and the Bank had a 11.12% tier 1 leverage ratio and a 12.47% tier 1 risk-based ratio. Our ability to
attract capital has facilitated our growth and is an integral component to the execution of our
business plan.
Scalable Operating Platform. We provide banking technology, including remote deposit capture,
internet banking and mobile banking, to provide our customers with maximum flexibility and
create a scalable platform to accommodate our future growth aspirations. We believe that our
advanced technology combined with responsive and personal service provides our customers with
a superior banking experience.
•
•
•
Employees
At December 31, 2014, we had a total of 123 full-time employees, 6 part-time employees and 1
temporary employee. None of our employees is subject to a collective bargaining agreement.
Company Website and Availability of Securities and Exchange Commission Filings
Information regarding the Company is available
tab at
mybankwell.com. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and any amendments to those reports filed pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 are available free of charge at sec.gov and at mybankwell.com under the
Investor Relations tab. Information on the website is not incorporated by reference and is not a part of this
annual report on Form 10-K.
Investor Relations
through the
Competition
The financial services industry in our market and the surrounding area is highly competitive. We
compete with commercial banks, savings banks, savings associations, money market funds, mortgage
brokers, finance companies, credit unions, insurance companies, investment firms and private lenders in
various segments of our business. Many of these competitors have more assets, capital and lending limits,
and resources than we do and may be able to conduct more intensive and broader based promotional efforts
to reach both commercial and individual customers. Competition for deposit products can depend heavily
on pricing because of the ease with which customers can transfer deposits from one institution to another.
We focus our marketing efforts on small to medium-sized businesses, professionals and individuals and
their employees. This focus includes retail, service, wholesale distribution, manufacturing and international
businesses. We attract these customers based on relationships and contacts that our management and our
board of directors have within and beyond the market area. We do not expect to compete with large
4
institutions for the primary banking relationships of large corporations. Rather, we compete for niches in
this business segment and for the consumer business of employees of such entities. Many of our larger
commercial bank competitors have greater name recognition and offer certain services that we do not.
However, we believe that our presence in our primary market area and focus on providing superior service
to professionals at small to medium sized businesses and individual employees of such businesses are
instrumental to our success.
We emphasize personalized banking services and the advantage of local decision-making in our
banking businesses, and this emphasis has been well received by the public in our market area. We derive a
majority of our business from our local market area which includes its primary market area of Fairfield and
New Haven Counties.
Lending Activities
General. Our primary lending focus is to serve commercial and middle-market businesses and their
executives, high net worth individuals, not-for-profit organizations and consumers with a variety of
financial products and services, while maintaining strong and disciplined credit policies and procedures. We
offer a full array of commercial and retail
lending products to serve the needs of our customers.
Commercial lending products include owner-occupied commercial real estate loans, commercial real estate
investment loans, commercial loans (such as business term loans, equipment financing and lines of credit)
to small and mid-sized businesses and real estate construction and development loans. Retail lending
products include residential mortgage loans, home equity lines of credit and consumer installment loans.
Our retail lending products are offered to the community in general and as an accommodation to our
commercial customers, and their executives and employees. We focus our lending activities on loans that we
originate from borrowers located in our market. We have established an informal, internal lending limit of
$25MM to one borrower/relationship subject to the statutory maximum of 15% of our unimpaired capital
and reserves for loan loss and up to 50% for commercial real estate-secured loans.
We market our lending products and services to qualified borrowers through conveniently located
banking offices, relationship networks and high touch personal service. We target our business development
and marketing strategy primarily on small to medium businesses with between $2 million and $30 million in
annual revenue. Our relationship managers actively solicit the business of companies entering our market
areas as well as long-standing businesses operating in the communities we serve. We seek to attract new
lending customers through professional service, relationship networks, competitive pricing and innovative
structure, including the utilization of federal and state tax incentives. We pride ourselves on smart, efficient
underwriting and timely decision making for new loan requests due to our leaner approval structure and
local decision-making. We believe this gives us a competitive advantage over larger institutions that are not
as nimble.
5
Total
loans before deferred loan fees and the allowance for loan losses were $929.8 million at
December 31, 2014. Since December 31, 2010, total loans have increased $641.4 million from $288.4
million, reflecting expansion of our branch network, including $108.3 million of acquired loans from The
Wilton Bank and Quinnipiac Bank and Trust Company. The following table summarizes the composition
of our loan portfolio for the dates indicated.
2014
At December 31,
2013
2012
Percent of
Loan
Portfolio
Amount
Percent of
Loan
Portfolio
Amount
Percent of
Loan
Portfolio
Amount
(In thousands)
Real estate loans:
Residential
. . . . . . . . . . . . . . . . . .
$175,031
18.83% $155,874
24.66% $144,288
27.22%
Commercial . . . . . . . . . . . . . . . . . .
521,181
56.06
316,533
50.08
284,763
53.72
Construction . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . .
63,229
18,166
6.80
1.95
51,545
13,892
8.16
2.20
33,148
11,030
6.26
2.08
777,607
83.64
537,844
85.10
473,229
89.28
Commercial business . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . .
149,259
2,896
16.05
0.31
93,566
602
14.80
0.10
56,764
57
10.71
0.01
Total loans
. . . . . . . . . . . . . . . . . .
$929,762
100.00% $632,012
100.00% $530,050
100.00%
Real estate loans:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
At December 31,
2011
2010
Percent of
Loan
Portfolio
Amount
Percent of
Loan
Portfolio
Amount
(In thousands)
$104,754
173,951
40,422
14,815
28.37% $104,053
111,271
47.10
38,072
10.95
16,657
4.01
36.08%
38.58
13.20
5.77
333,942
90.43
270,053
93.63
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer
35,041
311
9.49
0.08
17,713
659
6.14
0.23
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$369,294
100.00% $288,425
100.00%
loans,
Commercial
loans. We offer a wide range of commercial
including business term loans,
equipment financing and lines of credit to small and midsized businesses. Our target commercial loan
market is retail and professional establishments and small- to medium-sized businesses. The terms of these
loans vary by purpose and by type of underlying collateral. The commercial
loans primarily are
underwritten on the basis of the borrower’s ability to service the loan from cash flow. We make equipment
loans with conservative margins generally for a term of ten years or less, supported by the useful life of the
equipment, at fixed or variable rates, with the loan fully amortizing over the term. Loans to support
working capital typically have terms not exceeding one year and usually are secured by accounts receivable,
inventory and personal guarantees of the principals of the business and often by the commercial real estate
of the borrower. For loans secured by accounts receivable or inventory, principal typically is repaid as the
assets securing the loan are converted into cash, and for loans secured with other types of collateral,
principal is typically due at maturity. The quality of the commercial borrower’s management and its ability
both to properly evaluate changes in the supply and demand characteristics affecting its markets for
6
products and services and to effectively respond to such changes are significant factors in a commercial
borrower’s creditworthiness. Risks associated with our commercial loan portfolio include those related to
the strength of the borrower’s business, which may be affected not only by local, regional and national
market conditions, but also changes in the borrower’s management and other factors beyond the borrower’s
control; those related to fluctuations in value of any collateral securing the loan; and those related to terms
of the commercial loan, which may include balloon payments that must be refinanced or paid off at the end
of the term of the loan. Our commercial loan portfolio presents a higher risk profile than our consumer real
estate and consumer loan portfolios.
Commercial
real estate loans
real estate loans. We offer
for commercial property that
is
owner-occupied as well as commercial property owned by real estate investors. Commercial loans that are
secured by owner-occupied commercial real estate and primarily collateralized by operating cash flows are
also included in this category of loan. Commercial real estate loan terms generally are limited to ten years
or less, although payments may be structured on a longer amortization basis of 20 to 25 years. The interest
rates on our commercial real estate loans may be fixed or adjustable, although rates typically are not fixed
for a period exceeding five to ten years. We generally charge an origination fee for our services. We typically
require personal guarantees from the principal owners of the business or real estate supported by a review
of the principal owners’ personal financial statements. Risks associated with commercial real estate loans
include fluctuations in the value of real estate, the overall strength of the economy, new job creation trends,
tenant vacancy rates, environmental contamination, and the quality of the borrower’s management. We
make efforts to limit our risk by analyzing borrowers’ cash flow and collateral value as well as all of the
sponsors’ investment activities. The real estate securing our existing commercial real estate loans includes a
wide variety of property types, such as owner-occupied offices/warehouses/production facilities, office
buildings,
industrial, mixed-use residential/commercial, retail centers and multifamily properties. Our
commercial real estate loan portfolio presents a higher risk profile than our consumer real estate and
consumer loan portfolios.
Construction loans. Our construction portfolio includes loans to small and midsized businesses to
construct owner-user properties, loans to developers of commercial real estate investment properties and
residential developments and, to a lesser extent, loans to individual clients for construction of single family
homes in our market. Construction and development loans are generally made with a term of one to two
years and interest is paid monthly. The ratio of the loan principal to the value of the collateral, as
established by independent appraisal, typically will not exceed industry standards. Loan proceeds are
disbursed based on the percentage of completion and only after the project has been inspected by an
experienced construction lender or third-party inspector. Risks associated with construction loans include
fluctuations in the value of real estate, project completion risk and change in market trends. We are also
exposed to risk based on the ability of the construction loan borrower to refinance the debt or sell the
property upon completion of the project, which may be affected by changes in market trends since the time
that we funded the construction loan.
Consumer real estate loans. We offer first lien one-to-four family mortgage loans, as well as home
equity lines of credit, in each case primarily on owner-occupied primary residences. We also originate for
resale one-to-four family mortgage loans, which are classified as loans held for sale until sold to investors.
Although our consumer real estate loan portfolio presents lower levels of risk than our commercial,
commercial real estate and construction loan portfolios, we are exposed to risk based on fluctuations in the
value of the real estate collateral securing the loan, as well as changes in the borrower’s financial condition,
which could be affected by numerous factors, including divorce, job loss, illness or other personal hardship.
Consumer loans. We offer consumer loans as an accommodation to our existing customers, but do
not market consumer loans to persons who do not have a pre-existing relationship with us. As of
December 31, 2014, our consumer loans represented less than 1% of our total loan portfolio. We do not
expect our consumer loans to become a material component of our loan portfolio at any time in the
foreseeable future. Although we do not engage in any material amount of consumer lending, our consumer
loans, which are underwritten primarily based on the borrower’s financial condition and, in many cases, are
unsecured credits, subject us to risk based on changes in the borrower’s financial condition, which could be
affected by numerous factors, including those discussed above.
7
Credit Policy and Procedures
General. We adhere to what we believe are disciplined underwriting standards, but also remain
cognizant of the need to serve the credit needs of customers in our primary market areas by offering flexible
loan solutions in a responsive and timely manner. We also seek to maintain a broadly diversified loan
portfolio across customer, product and industry types. However, our lending policies do not provide for any
loans that are highly speculative, subprime, or that have high loan-to-value ratios. These components,
together with active credit management, are the foundation of our credit culture, which we believe is critical
to enhancing the long term value of our organization to our customers, employees, shareholders and
communities.
We have a service-driven,
relationship-based, business-focused credit culture,
than a
price-driven, transaction-based culture. Accordingly, substantially all of our loans are made to borrowers
located or operating in our primary market with whom we have ongoing relationships across various
product lines. The limited number of loans secured by properties located in out-of-market areas that we
have made are generally to borrowers who are well-known to us. These borrowers typically have strong
deposit relationships with the Bank.
rather
Credit concentrations.
In connection with the management of our credit portfolio, we actively manage
the composition of our loan portfolio, including credit concentrations. We monitor borrower and loan
product concentrations on at least a quarterly basis. Loan product concentrations are reviewed annually in
conjunction with the portfolio’s credit quality and the business plan for the coming year. All concentrations
are monitored by our Chief Credit Officer and our Loan Committee. We have also established an informal,
internal lending limit of $25MM to one borrower/relationship subject to the statutory maximum of 15% of
our unimpaired capital and reserves for loan loss and up to 50% for commercial real estate-secured loans.
Our top 20 borrowing relationships range in exposure from $7.3 million to $27.7 million and are monitored
on an on-going basis.
Loan approval process. We seek to achieve an appropriate balance between prudent, disciplined
underwriting, on the one hand, and flexibility in our decision-making and responsiveness to our customers,
on the other hand. Our credit approval policies have a tiered approval process, with larger exposures
referred to the Bank’s internal loan committee and the Board Loan Committee, as appropriate, based on
the size of the loan. Smaller exposures are approved under a three-signature system. Loans with policy
exceptions require the next higher level of approval authority, the highest of which is the Loan Committee,
depending on dollar amount. These authorities are periodically reviewed and updated by our board of
directors. We believe that our credit approval process provides for thorough underwriting and efficient
decision making.
Credit risk management. Credit risk management involves a partnership between our relationship
managers and our credit approval, credit administration and collections personnel. Portfolio monitoring
and early problem recognition are an important aspect of maintaining our high credit quality standards.
Past due reports are reviewed daily, as well as insurance and tax payment monitoring. Our evaluation and
compensation program for our relationship managers includes significant goals that we believe motivate the
relationship managers to focus on high quality credit consistent with our strategic focus on asset quality.
It is our policy to review all amortizing commercial loans in excess of $300 thousand on an annual
basis, or more frequently through the receipt of
interim financial statements and borrowing base
certificates. Our policies require rapid notification of delinquency and prompt initiation of collection
actions. Relationship managers, credit administration personnel and senior management proactively
support collection activities in order to maximize accountability and efficiency.
As part of these annual review procedures, we analyze recent financial statements of the collateral
property, business and/or borrower to determine the current level of occupancy, revenues and expenses and
to investigate any deterioration in the value of the real estate collateral or in the borrower’s or Company’s
financial condition. Upon completion, we update the risk rating grade assigned to each loan. Relationship
managers are encouraged to bring potential credit issues to the attention of our Chief Credit Officer
immediately upon any sign of deterioration in the performance of the borrower. We maintain a list of loans
that receive additional attention if we believe there may be a potential credit risk via our Watch List report.
8
Loans that are downgraded are reviewed by our Chief Credit Officer, while classified loans undergo a
detailed quarterly analysis prepared by the lending officer and reviewed by management and our internal
loan committee. This review includes an evaluation of the market conditions, the property’s or company’s
trends, the borrower and guarantor status, the level of reserves required and loan accrual status.
Additionally, we have an independent, third-party review performed on our loan grades and our credit
administration functions each year. Finally, we perform an annual stress test of our commercial real estate
portfolio, in which we evaluate the impact on the portfolio of declining economic conditions, including
lower values and decline in net operating income which may result from lower rental rates, lower occupancy
rates and higher interest rates. Management reviews these reports and presents them to our Loan
Committee. These asset review procedures provide management with additional information for assessing
our asset quality.
Investment Activities
We manage our investment portfolio primarily for liquidity purposes, with a secondary focus on
returns through the use of a liquidity portfolio and an earnings portfolio. Our liquidity portfolio’s primary
purpose is to provide adequate liquidity necessary to meet any reasonable decline in deposits and any
anticipated increase in the loan portfolio. The majority of these securities are classified as available-for-sale.
Our earnings portfolio’s primary purpose is to generate earnings adequate to provide and contribute to
stable income and to generate a profitable return while minimizing risk. Additionally, our investment
portfolio is used to provide adequate collateral for various regulatory or statutory requirements and to
manage our interest rate risk. We invest in a variety of high-grade securities, including government agency
securities, government guaranteed mortgage backed securities, highly rated corporate bonds and municipal
securities. We regularly evaluate the composition of our portfolio as changes occur with respect to the
interest rate yield curve. Although we may sell investment securities from time to time to take advantage of
changes in interest rate spreads, it is our policy not to sell investment securities unless we can reinvest the
proceeds at a similar or higher spread, so as not to take gains to the detriment of future income.
The investment policy is reviewed annually by our board of directors. Overall investment goals are
established by our board of directors, Chief Financial Officer and our asset/liability management
committee, or ALCO. Our board of directors has delegated the responsibility of monitoring our investment
activities to ALCO. Day-to-day activities pertaining to the investment portfolio are conducted within our
accounting department under the supervision of our Chief Financial Officer.
Deposits
Deposits are our primary source of
funds to support our earning assets. We offer traditional
depository products, including checking, savings, money market and certificates of deposit with a variety of
rates. Deposits at the Bank are insured by the FDIC up to statutory limits. We price our deposit products
with a view to maximizing our share of each customer’s financial services business, and our loan pricing
gives value to deposits from our loan customers.
We have built out a network of eight deposit-taking branch offices and attracted significant transaction
account business through our relationship-based approach. As a result of our significant deposit growth in
transaction accounts, which we define as demand, NOW and money market deposits, we have achieved a
favorable deposit mix between transaction accounts and certificates of deposit.
Borrowed Funds
The Bank is a member of the Federal Home Loan Bank of Boston (FHLBB), which is part of a twelve
district Federal Home Loan Bank System. Members are required to own capital stock of the FHLBB, and
borrowings are collateralized by qualifying assets not otherwise pledged (principally single-family residential
mortgage loans and securities). The maximum amount of credit that the FHLBB will extend varies from
time to time, depending on its policies and the amount of qualifying collateral the member can pledge. We
utilize advances from the FHLBB as part of our overall funding strategy and to meet short-term liquidity
needs
Investment Services
On October 15, 2013, we launched Bankwell Investment Services, which provides a range of services,
including, but not limited to: 401k rollover planning, retirement planning, asset allocation planning,
9
financial planning, business planning, estate planning, mutual funds, fixed and variable annuities, exchange
traded funds, separate managed accounts, stocks and bonds, traditional and Roth IRAs and brokerage
certificates of deposits. These services are handled through Kingston Wealth Management Group and
Investacorp, Inc. and are not obligations of Bankwell and are not endorsed nor recommended by us. We
earn a fixed percentage of the revenue generated on products sold through Kingston Wealth Management
Group and Investacorp, Inc., net of commissions paid to the financial advisors. These products and services
are not savings accounts, deposits, or other obligations of the Bank and are not insured or guaranteed by
the FDIC or any other governmental agency.
Small Business Lending Fund Program
Since 2011, we have participated in the Small Business Lending Fund program, or SBLF, offered by the
United States Department of the Treasury, a dedicated investment fund designed to encourage lending to
small businesses by providing capital to qualified community banks and community development loan
funds with assets of less than $10 billion. In connection with SBLF, the Treasury purchased shares of our
preferred stock on August 4, 2011 for an aggregate purchase price of approximately $11.0 million. We used
the proceeds from the SBLF funding to repurchase the preferred stock issued by us to the Treasury in
connection with its Capital Purchase Program, as well as to provide additional capital to the Bank, allowing
the Bank to expand its small business lending programs. In a recent report, the U.S. Treasury Department
ranked Bankwell Financial Group first in the nation for growth in qualified small business lending in its
Small Business Lending Fund at June 30, 2014. As a result of our success in making loans through the
program, we were allowed to pay dividends at a 1% interest rate. The SBLF funds must be repaid by
February 4, 2016 or the interest rate on the preferred stock will automatically increase to 9% per year.
Enterprise Risk Management
We place significant emphasis on risk mitigation as an integral component of our organizational
culture. We believe that our emphasis on risk management is manifested in our solid asset quality statistics.
Risk management with respect to our lending philosophy focuses, among other things, on structuring
credits to provide for multiple sources of repayment, coupled with strong underwriting undertaken by
experienced bank officers and credit policy personnel. We perform quarterly loan impairment analyses on
criticized loans and criticized asset action plans for those borrowers who display deteriorating financial
conditions in order to monitor those relationships and implement corrective measures on a timely basis to
minimize losses. In addition, we perform an annual stress test of our commercial real estate portfolio, in
which we evaluate the impact on the portfolio of declining property values and lower net operating incomes
as a result of economic conditions, including lower rental rates and lower occupancy rates. The stress test
focuses only on the cash flow and valuation of the properties and ignores the liquidity, net worth and cash
flow of any guarantors related to the credits.
We also focus on risk management in other areas throughout our organization. The Chief Risk Officer
oversees the Risk Management function and chairs a Risk Management Steering Committee. We currently
outsource our asset/liability management process to a reputable third party, and on a quarterly basis, we
run the full interest rate risk model. Results of the model are reviewed and validated by our ALCO.
Additionally, we are in the process of developing our regulatory compliance and internal control procedures
in accordance with FDICIA requirements.
Supervision and Regulation
General
The Bank, a Connecticut state-chartered commercial bank, is subject to extensive regulation by the
Connecticut Department of Banking, as its chartering agency, and by the FDIC, as its deposit insurer. The
Bank’s deposits are insured up to applicable limits by the FDIC through the Deposit Insurance Fund. The
Bank is required to file reports with, and is periodically examined by, the FDIC and the Connecticut
Department of Banking concerning its activities and financial condition and must obtain regulatory
approvals prior to entering into certain transactions, such as mergers with, or acquisitions of, other
financial institutions.
10
The primary goals of the bank regulatory scheme are to maintain a safe and sound banking system
and to facilitate the conduct of sound monetary policy. This scheme is intended primarily for the protection
of the Deposit Insurance Fund and bank depositors, rather than our shareholders and creditors. The
banking agencies have broad enforcement power over bank holding companies and banks, including the
authority, among other things, to enjoin “unsafe or unsound” practices, require affirmative action to correct
any violation or practice, issue administrative orders that can be judicially enforced, direct increases in
capital, direct the sale of subsidiaries or other assets, limit dividends and distributions, restrict growth,
assess civil money penalties, remove officers and directors, and, with respect to banks, terminate deposit
insurance or place the bank into conservatorship or receivership. In general, these enforcement actions may
be initiated for violations of laws and regulations or unsafe or unsound practices.
The following discussion is a summary of
laws and regulations applicable to our
operations, but does not purport to be a complete summary of all applicable laws, rules and regulations.
These laws and regulations may change from time to time and the regulatory agencies often have broad
discretion in interpreting them. Any change in such laws or regulations, whether by the Connecticut
Department of Banking, the FDIC or the Federal Reserve Board could have a material adverse impact on
the financial markets in general, and our operations and activities, financial condition, results of operations,
growth plans and future prospects specifically.
the material
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Act has significantly changed the current bank regulatory structure and will affect
into the immediate future the lending and investment activities and general operations of depository
institutions and their holding companies.
The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with extensive powers
to implement and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad
rulemaking authority for a wide range of consumer protection laws that apply to all banks and savings
associations including, among other things, the authority to prohibit “unfair, deceptive or abusive” acts and
practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all
banks and savings associations with more than $10 billion in assets. Banks and savings associations with
$10 billion or less in assets will continue to be examined for compliance with federal consumer protection
and fair lending laws by their applicable primary federal bank regulators. The Dodd-Frank Act also
weakens the federal preemption available for national banks and federal savings associations and gives state
attorneys general certain authority to enforce applicable federal consumer protection laws.
The Dodd-Frank Act made many other changes to banking regulation including authorizing
depository institutions, for the first time, to pay interest on business checking accounts, requiring
originators of securitized loans to retain a percentage of the risk for transferred loans, establishing
regulatory rate-setting for certain debit card interchange fees, establishing a number of reforms for
mortgage originations, requiring bank holding companies and banks to be “well capitalized” and “well
managed” in order to acquire banks located outside of their home state, requiring any bank holding
company electing to be treated as a financial holding company to be “well capitalized” and “well managed”
and authorizing national and state banks to establish de novo branches in any state that would permit a
bank chartered in that state to open a branch at that location.
The Dodd-Frank Act also broadened the base for the FDIC insurance assessments. The FDIC was
required to promulgate rules revising its assessment system so that insurance assessments are based on the
average consolidated total assets less tangible equity capital of an insured depository institution instead of
deposits. That rule took effect April 1, 2011. The Dodd-Frank Act also permanently increased the
maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per
depositor, retroactive to January 1, 2008.
The Dodd-Frank Act increased shareholder influence over boards of directors by requiring companies
to give shareholders a nonbinding vote on executive compensation and so-called “golden parachute”
payments, and by authorizing the SEC to promulgate rules that would allow shareholders to nominate and
solicit votes for their own candidates using a company’s proxy materials.
11
Many of the provisions of the Dodd-Frank Act are not yet effective, and the Dodd-Frank Act requires
various federal agencies to promulgate numerous and extensive implementing regulations over the next
several years. It is therefore challenging to predict at this time what impact the Dodd-Frank Act and
implementing regulations will have on community banks and their holding companies. Although the
substance and scope of many of these regulations cannot be determined at this time, it is expected that the
legislation and implementing regulations, particularly those provisions relating to the Consumer Financial
Protection Bureau, may increase our operating and compliance costs.
Connecticut Banking Laws and Supervision
Connecticut Department of Banking. The Connecticut Department of Banking regulates internal
organization as well as the deposit, lending and investment activities of state-chartered banks, including the
Bank. The approval of the Connecticut Department of Banking is required for, among other things, the
establishment of branch offices and business combination transactions. The Connecticut Department of
Banking conducts periodic examinations of Connecticut chartered banks. The FDIC also regulates many of
the areas regulated by the Connecticut Department of Banking, and federal law may limit some of the
authority provided to Connecticut chartered banks by Connecticut law.
Lending Activities. Connecticut banking laws grant banks broad lending authority. With certain
limited exceptions, fully secured and unsecured loans of any one obligor under this statutory authority may
not exceed 10% and 15%, respectively, of a bank’s equity capital and allowance for loan losses.
Dividends. The Bank may pay cash dividends out of its net profits. For purposes of this restriction,
“net profits” represents the remainder of all earnings from current operations. Further, the total amount of
all dividends declared by a bank in any year may not exceed the sum of a bank’s net profits for the year in
question combined with its retained net profits from the preceding two years. Federal law also prevents an
institution from paying dividends or making other capital distributions that, if by doing so, would cause it
to become “undercapitalized”. The FDIC may further limit a bank’s ability to pay dividends. Moreover, the
federal agencies have issued policy statements that provide that insured banks should generally only pay
dividends out of current operating earnings.
Powers. Connecticut law permits Connecticut banks to sell insurance and fixed and variable rate
annuities if licensed to do so by the Connecticut Insurance Department. With the prior approval of the
Connecticut Department of Banking, Connecticut banks are also authorized to engage in a broad range of
activities related to the business of banking, or that are financial in nature or that are permitted under the
Bank Holding Company Act or the Home Owners’ Loan Act, both federal statutes, or the regulations
promulgated as a result of these statutes. Connecticut banks are also authorized to engage in any activity
permitted for a national bank or a federal savings association upon filing notice with the Connecticut
Department of Banking unless the Connecticut Department of Banking disapproves the activity.
Assessments. Connecticut banks are required to pay annual assessments to the Connecticut
Department of Banking to fund the Connecticut Department of Banking’s operations. The general
assessments are paid pro-rata based upon a bank’s asset size.
Enforcement. Under Connecticut
the Connecticut Department of Banking has extensive
enforcement authority over Connecticut banks and, under certain circumstances, affiliated parties, insiders,
and agents. The Connecticut Department of Banking’s enforcement authority includes cease and desist
orders,
fines, receivership, conservatorship, removal of officers and directors, emergency closures,
dissolution and liquidation.
law,
Federal Bank Holding Company Regulation
General. As a bank holding company, we are subject to comprehensive regulation and regular
examinations by the Federal Reserve Board. The Federal Reserve Board also has extensive enforcement
authority over bank holding companies, including, among other things, the ability to assess civil money
penalties, to issue cease and desist or removal orders and to require that a bank holding company divest
subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations
of law and regulations and unsafe or unsound practices.
12
Under Federal Reserve Board policy which has been codified by the Dodd-Frank Act, a bank holding
company must serve as a source of strength for its subsidiary bank. Under this policy, the Federal Reserve
Board may require, and has required in the past, a bank holding company to contribute additional capital
to an undercapitalized subsidiary bank. A bank holding company must obtain Federal Reserve Board
approval before: (1) acquiring, directly or indirectly, ownership or control of any voting securities of
another bank or bank holding company if, after such acquisition, it would own or control more than 5% of
such securities (unless it already owns or controls the majority of such securities); (2) acquiring all or
substantially all of the assets of another bank or bank holding company; or (3) merging or consolidating
with another bank holding company. Under Connecticut banking law, no person may acquire beneficial
ownership of more than 10% of any class of voting securities of a Connecticut chartered bank, or any bank
holding company of such a bank, without prior notification of, and lack of disapproval by, the Connecticut
Department of Banking.
The Bank Holding Company Act also prohibits a bank holding company, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company
which is not a bank or bank holding company, or from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by Federal
Reserve Board regulation or order, have been identified as activities closely related to the business of
banking or managing or controlling banks. The list of activities permitted by the Federal Reserve Board
includes, among other things: (1) operating a savings institution, mortgage company, finance company,
credit card company or factoring company; (2) performing certain data processing operations; (3) providing
certain investment and financial advice; (4) underwriting and acting as an insurance agent for certain types
of credit-related insurance; (5) leasing property on a full-payout, non-operating basis; (6) selling money
orders, travelers’ checks and United States savings bonds; (7) real estate and personal property appraising;
(8) providing tax planning and preparation services; (9) financing and investing in certain community
development activities; and (10) subject to certain limitations, providing securities brokerage services for
customers.
Dividends. The Federal Reserve Board has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the Federal Reserve Board’s view that a bank
holding company should pay cash dividends only to the extent that the Bank Holding Company’s net
income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that
is consistent with the Bank Holding Company’s capital needs, asset quality and overall financial condition.
The Federal Reserve Board also indicated that it would be inappropriate for a bank holding company
experiencing serious financial problems to borrow funds to pay dividends.
Substantially all of our income is derived from, and the principal source of our liquidity is, dividends
from the Bank. The ability of the Bank to pay dividends to us is also restricted by federal and state laws,
regulations and policies. The Bank may pay cash dividends out of its net profits. For purposes of this
restriction, “net profits” represents the remainder of all earnings from current operations. Further, the total
amount of all dividends declared by a bank in any year may not exceed the sum of a bank’s net profits for
the past two fiscal years, plus the portion of the year in which the dividend is paid.
Under federal law, the Bank may not pay any dividend to us if the Bank is undercapitalized or the
payment of the dividend would cause it to become undercapitalized. The FDIC may further restrict the
payment of dividends by requiring the Bank to maintain a higher level of capital than would otherwise be
required for it to be adequately capitalized for regulatory purposes. Moreover, if, in the opinion of the
FDIC, the Bank is engaged in an unsafe or unsound practice (which could include the payment of
dividends), the FDIC may require, generally after notice and hearing, it to cease such practice. The FDIC
has indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level
would be an unsafe banking practice. The FDIC has also issued policy statements providing that insured
depository institutions generally should pay dividends only out of current operating earnings.
Redemption. Bank holding companies are required to give the Federal Reserve Board prior written
notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the
purchase or redemption, when combined with the net consideration paid for all such purchases or
13
redemptions during the preceding 12 months, is equal to 10% or more of the consolidated net worth of the
Bank Holding Company. The Federal Reserve Board may disapprove such a purchase or redemption if it
determines that the proposal would constitute an unsafe or unsound practice or would violate any law,
regulation, Federal Reserve Board order or any condition imposed by, or written agreement with, the
Federal Reserve Board. This notification requirement does not apply to any bank holding company that
meets the well capitalized standard for commercial banks, is “well managed” within the meaning of the
Federal Reserve Board regulations and is not subject to any unresolved supervisory issues.
Federal Bank Regulation
Safety and Soundness. The federal banking agencies, including the FDIC, have implemented rules and
guidelines concerning standards for safety and soundness required pursuant to Section 39 of the Federal
Deposit Insurance Corporation Improvement Act, or FDICIA. In general, the standards relate to
(1) operational and managerial matters; (2) asset quality and earnings; and (3) compensation. The
operational and managerial standards cover (a) internal controls and information systems, (b) internal audit
systems, (c) loan documentation, (d) credit underwriting, (e) interest rate exposure, (f) asset growth, and
(g) compensation, fees and benefits. Under the asset quality and earnings standards, the Bank is required to
establish and maintain systems to (i) identify problem assets and prevent deterioration in those assets, and
(ii) evaluate and monitor earnings and ensure that earnings are sufficient to maintain adequate capital
reserves. Finally, the compensation standard states that compensation will be considered excessive if it is
unreasonable or disproportionate to the services actually performed by the individual being compensated. If
an insured state-chartered bank fails to meet any of the standards promulgated by regulation, then such
institution will be required to submit a plan within 30 days to the FDIC specifying the steps it will take to
correct the deficiency. In the event that an insured state-chartered bank fails to submit or fails in any
material respect to implement a compliance plan within the time allowed by the federal banking agency,
Section 39 of the FDICIA provides that the FDIC must order the institution to correct the deficiency and
may (1) restrict asset growth; (2) require the bank to increase its ratio of tangible equity to assets; (3) restrict
the rates of interest that the bank may pay; or (4) take any other action that would better carry out the
purpose of prompt corrective action. We believe that the Bank has been and will continue to be in
compliance with each of the standards as they have been adopted by the FDICIA.
Capital Requirements. The Federal Reserve Board monitors our capital adequacy, on a consolidated
basis, and the FDIC and Connecticut Department of Banking monitor the capital adequacy of the Bank.
FDIC and Federal Reserve regulations currently require banks and bank holding companies generally
to maintain three minimum capital standards: (1) a Tier I capital to adjusted total assets ratio, or Leverage
Capital Ratio, of at least 4% (for certain banking organizations, of at least 3%), (2) a Tier I capital to
risk-weighted assets ratio, or Tier I Risk-Based Capital Ratio, of at least 4% and (3) a total risk-based
capital (Tier I plus Tier 2) to risk-weighted assets ratio, Total Risk-Based Capital Ratio, of at least 8%. Tier
I capital is the sum of common shareholders’ equity, qualifying non-cumulative perpetual preferred stock,
retained earnings and minority investments in certain subsidiaries, less goodwill and other intangible assets
(except for certain servicing rights and credit card relationships) and certain other specified items.
The FDIC regulations require state non-member banks to maintain certain levels of regulatory capital
in relation to regulatory risk-weighted assets. The ratio of regulatory capital to regulatory risk-weighted
assets is referred to as a bank’s risk-based capital ratio. Risk-based capital ratios are determined by
allocating assets and specified off-balance sheet items (including recourse obligations, direct credit
substitutes and residual interests) to five risk-weighted categories ranging from 0% to 200%, with higher
levels of capital being required for the categories perceived as representing greater risk. For example, under
the FDIC’s risk-weighting system, cash and securities backed by the full faith and credit of the U.S.
government are given a 0% risk weight, loans secured by one-to-four family residential properties generally
have a 50% risk weight, and commercial loans have a risk weighting of 100%.
State non-member banks such as the Bank, must maintain a minimum ratio of total capital to
risk-weighted assets of 8%, of which at least one-half must be Tier I capital. Total capital consists of Tier I
capital plus Tier 2 or supplementary capital items, which include allowances for loan losses in an amount of
up to 1.25% of risk-weighted assets, cumulative perpetual preferred stock, qualifying subordinated debt and
certain other capital instruments, and a portion of the net unrealized holding gain on equity securities. The
14
includable amount of Tier 2 capital cannot exceed the amount of the institution’s Tier I capital. Banks that
engage in specified levels of trading activities are subject to adjustments in their risk based capital
calculation to ensure the maintenance of sufficient capital to support market risk.
In July 2013, the Federal Reserve Board promulgated a final rule and the FDIC promulgated an
interim final rule implementing Basel III. Basel III is a comprehensive set of reform measures, developed by
to strengthen the regulation, supervision and risk
the Basel Committee on Banking Supervision,
management of the banking sector. These new requirements were effective on January 1, 2015 for us. In
general, the new rules revise regulatory capital definitions and minimum ratios, redefine Tier I capital,
create a new capital ratio (common equity Tier I risk-based capital ratio), require a capital conservation
buffer, revise prompt corrective action thresholds to add a new ratio to these thresholds (discussed in more
detail below) and revise risk weighting for certain asset categories and off-balance sheet exposures. Under
the new regulations effective January 1, 2015, (1) a new requirement to maintain a ratio of common equity
Tier I capital to total risk-based assets of not less than 4.5% will be implemented, (2) the minimum
Leverage Capital Ratio for all financial institutions will be at least 4%, (3) the minimum Tier I Risk-Based
Capital Ratio has been increased from 4% to 6% and (4) the Total Risk-Based Capital Ratio has been
maintained at 8%. In addition, the new regulations impose certain limitations on dividends, share buybacks,
discretionary payments on Tier I instruments and discretionary bonuses to executive officers if the
organization fails to maintain a capital conservation buffer of common equity Tier I capital in an amount
greater than 2.5% of its total risk-weighted assets. When the capital conservation buffer is fully phased-in,
institutions will need to hold an additional 2.5% capital over the percentages listed above. The new
regulations will be phased in over a period of time. The capital conservation buffer will be phased-in over a
five year period with the full 2.5% requirement starting as of January 1, 2019.
Additionally, under the new regulations, the method for calculating the ratios has been revised to
generally enhance risk sensitivity as well as provide alternatives to credit ratings for calculating
risk-weighted assets.
FDICIA required each federal banking agency to revise its risk-based capital standards for insured
institutions to ensure that those standards take adequate account of interest-rate risk, concentration of
credit risk, and the risk of nontraditional activities, as well as to reflect the actual performance and expected
risk of loss on multi-family residential loans. The FDIC, along with the other federal banking agencies, has
adopted a regulation providing that the agencies will take into account the exposure of a bank’s capital and
economic value to changes in interest rate risk in assessing a bank’s capital adequacy. The FDIC also has
authority to establish individual minimum capital requirements in appropriate cases upon determination
that an institution’s capital
the particular
circumstances.
is, or is likely to become,
inadequate in light of
level
Prompt Corrective Regulatory Action. Federal law requires, among other things, that federal bank
regulatory authorities take “prompt corrective action” with respect to banks that do not meet minimum
capital requirements. For these purposes, the law establishes five capital categories: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. As
mentioned above,
in July 2013, the Federal Reserve Board promulgated a final rule and the FDIC
promulgated an interim final rule implementing Basel III, providing revised prompt corrective action ratios
effective on January 1, 2015.
Currently, an institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of
10% or greater, a Tier I risk-based capital ratio of 6% or greater and a leverage ratio of 5% or greater. An
institution is “adequately capitalized” if it has a total risk-based capital ratio of 8% or greater, a Tier I
risk-based capital ratio of 4% or greater, and generally a leverage ratio of 4% or greater. An institution is
“undercapitalized” if it has a total risk-based capital ratio of less than 8%, a Tier I risk-based capital ratio
of less than 4%, or generally a leverage ratio of less than 4%. An institution is deemed to be “significantly
undercapitalized” if it has a total risk-based capital ratio of less than 6%, a Tier I risk-based capital ratio of
less than 3%, or a leverage ratio of
less than 3%. An institution is considered to be “critically
undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is
equal to or less than 2%. As of December 31, 2014, Bankwell was a well-capitalized institution.
Under the new regulations effective on January 1, 2015, certain changes to the prompt corrective action
ratios will be implemented, including an increase in the Tier I risk-based capital ratios as follows: “well
15
capitalized” an increase from 6% or greater to 8% or greater, “adequately capitalized” an increase from 4%
or greater to 6% or greater, “undercapitalized” an increase from less than 4% to less than 6% and
“significantly undercapitalized” an increase from less than 3% to less than 4%. Additionally, an institution’s
common equity Tier I risk based capital ratio would be required to be 6.5% or greater to be deemed “well
capitalized,” 4.5% or greater to be considered “adequately capitalized,” 4.5% or less to be deemed
“undercapitalized,” 3% or less to be deemed “significantly undercapitalized” and equal to or less than 2% to
be deemed “critically undercapitalized.” Further, if an institution’s ratio of tangible equity to total assets is
equal to or less than 2%, the institution would be deemed “critically undercapitalized”.
“Undercapitalized” banks must adhere to growth, capital distribution (including dividend) and other
limitations and are required to submit a capital restoration plan to regulators. A bank’s compliance with
such a plan is required to be guaranteed by any company that controls the undercapitalized institution in an
amount equal to the lesser of 5% of the institution’s total assets when deemed undercapitalized or the
amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to
is “significantly undercapitalized.” “Significantly
it
submit an acceptable plan,
undercapitalized” banks must comply with one or more of a number of additional restrictions, including
but not limited to an order by the FDIC to sell sufficient voting stock to become adequately capitalized,
requirements to reduce total assets, cease receipt of deposits from correspondent banks or dismiss directors
or officers, and restrictions on interest rates paid on deposits, compensation of executive officers and capital
distributions by the parent holding company. “Critically undercapitalized” institutions are subject to
additional measures including, subject to a narrow exception, the appointment of a receiver or conservator
within 270 days after it obtains such status.
is treated as if
it
Liquidity. We are required to maintain a sufficient amount of liquid assets to ensure our safe and
sound operation.
The final Basel III framework also requires banks and bank holding companies to measure their
liquidity against specific liquidity tests. Although similar in some respects to liquidity measures historically
applied by banks and banking agencies for management and supervisory purposes, the Basel III framework
would require specific liquidity tests by rule. On November 18, 2014 the Federal Reserve Board, the Federal
Deposit Insurance Corporation, and the office of the Comptroller of the Currency proposed clarifications
to the revised regulatory capital rules adopted by the agencies in July 2013.
Transactions with Affiliates. Under current federal law, transactions between depository institutions
and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act, or FRA, and the
Federal Reserve Board’s Regulation W. In a holding company context, at a minimum, the parent holding
company of a bank and any companies which are controlled by such parent holding company is an affiliate
of the bank. Generally, Section 23A limits the extent to which the bank or its subsidiaries may engage in
“covered transactions” with any one affiliate to 10% of such bank’s capital stock and surplus, and contains
an aggregate limit on all such transactions with all affiliates to 20% of capital stock and surplus. The term
“covered transaction” includes, among other things, the making of loans or other extensions of credit to an
affiliate and the purchase of assets from an affiliate. Section 23A also establishes specific collateral
requirements for loans or extensions of credit to, or guarantees, acceptances on letters of credit issued on
behalf of an affiliate. Section 23B requires that covered transactions and a broad list of other specified
transactions be on terms substantially the same, or no less favorable, to the bank or its subsidiary as similar
transactions with non-affiliates. The Dodd-Frank Act has expanded the definition of covered transactions
and increased the timing and other aspects of
the collateral requirements associated with covered
transactions, including an expansion of the covered transactions to include credit exposures related to
derivatives, repurchase agreements and securities lending arrangements and an increase in the amount of
time for which collateral requirements regarding covered transactions must be satisfied.
Loans to Insiders. Further, Section 22(h) of the FRA restricts a depository institution with respect to
loans to directors, executive officers, and principal shareholders (or insiders). Under Section 22(h), loans to
insiders and their related interests may not exceed, together with all other outstanding loans to such persons
and affiliated entities, the depository institution’s total unimpaired capital and unimpaired surplus. Loans to
insiders above specified amounts must receive the prior approval of the board of directors. Further, under
Section 22(h), loans to directors, executive officers and principal shareholders must be made on terms
16
substantially the same as offered in comparable transactions to other persons, except that such insiders may
receive preferential loans made under a benefit or compensation program that is widely available to the
depository institution’s employees and does not give preference to the insider over the employees. Section
22(g) of the FRA places additional limitations on loans to executive officers. In addition to enhancing
restrictions on insider transactions, the Dodd-Frank Act increases the types of transactions with insiders
subject to restrictions, including certain asset sales with insiders.
Enforcement. The FDIC has extensive enforcement authority over insured banks, including the Bank.
This enforcement authority includes, among other things, the ability to assess civil money penalties, issue
cease and desist orders and remove directors and officers. In general, these enforcement actions may be
initiated in response to violations of laws and regulations and unsafe or unsound practices.
The FDIC has authority under federal law to appoint a conservator or receiver for an insured bank
under limited circumstances. The FDIC is required, with certain exceptions, to appoint a receiver or
conservator for an insured state nonmember bank if that bank was “critically undercapitalized” on average
during the calendar quarter beginning 270 days after the date on which the institution became “critically
undercapitalized.” The FDIC may also appoint itself as conservator or receiver for an insured state
non-member institution under specific circumstances on the basis of the institution’s financial condition or
upon the occurrence of other events, including: (1) insolvency; (2) substantial dissipation of assets or
earnings through violations of law or unsafe or unsound practices; (3) existence of an unsafe or unsound
condition to transact business; and (4) insufficient capital, or the incurring of losses that will deplete
substantially all of the institution’s capital with no reasonable prospect of replenishment without federal
assistance.
Insurance of Deposit Accounts. Deposit accounts at the Bank are insured by the Deposit Insurance
Fund, generally up to a maximum of $250,000 per separately insured depositor, pursuant to changes made
permanent by the Dodd-Frank Act. The FDIC assesses insured depository institutions to maintain the
Deposit Insurance Fund. No institution may pay a dividend if
its deposit insurance
assessment.
in default of
Under the FDIC’s risk-based assessment system, insured depository institutions are assigned to a risk
category based on supervisory evaluations, regulatory capital
levels and other factors. A depository
institution’s assessment rate depends upon the category to which it is assigned and certain adjustments
specified by the FDIC, with less risky institutions paying lower assessments.
On February 7, 2011, as required by the Dodd-Frank Act, the FDIC published a final rule to revise the
deposit insurance assessment system. The rule, which took effect April 1, 2011, changed the assessment base
used for calculating deposit insurance assessments from deposits to average consolidated total assets less
average tangible equity capital. Since the new base is larger than the previous base, the FDIC also lowered
assessment rates so that the rule would not significantly alter the total amount of revenue collected from the
industry. The range of adjusted assessment rates is now 2.5 to 45 basis points of the new assessment base.
The rule is expected to benefit smaller financial institutions, which typically rely more on deposits for
funding, and shift more of the burden for supporting the Deposit Insurance Fund to larger financial
institutions, which are thought to have greater access to nondeposit funding.
The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of
estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the
1.35% ratio by September 30, 2020. In setting the assessments necessary to achieve the 1.35% ratio, the
FDIC is supposed to offset the effect of the increased ratio on insured institutions with assets of less than
$10 billion. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the
discretion of the FDIC. The FDIC has exercised that discretion by establishing a long range fund ratio of
2%.
A material increase in insurance premiums would likely have an adverse effect on the operating
expenses and results of operations of the Bank. Management cannot predict what insurance assessment
rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that a depository institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not know of
any practice, condition or violation that might lead to termination of the Bank’s deposit insurance.
17
Deposit Operations.
In addition to the regulations above, the Bank’s deposit operations are subject to
other federal laws applicable to depository accounts, such as the:
•
•
•
•
Truth-In-Savings Act, requiring certain disclosures for consumer deposit accounts;
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer
financial records and prescribes procedures for complying with administrative subpoenas of
financial records;
Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that
act, which govern automatic deposits to and withdrawals from deposit accounts and customers’
rights and liabilities arising from the use of automated teller machines and other electronic
banking services; and
Rules and regulations of the various federal banking agencies charged with the responsibility of
implementing these federal laws.
Federal Reserve System. The Federal Reserve Board regulations require depository institutions to
maintain noninterest earning reserves against their transaction accounts (primarily NOW and regular
checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained
against aggregate transaction accounts. We are in compliance with these requirements.
Federal Home Loan Bank of Boston (FHLBB). The Bank is a member of the FHLBB, which is one
of the regional Federal Home Loan Banks composing the Federal Home Loan Bank System. Each Federal
Home Loan Bank serves as a central credit facility primarily for its member institutions. The Bank, as a
member of the FHLBB, is required to acquire and hold shares of capital stock in the FHLBB.
Community Reinvestment Act (CRA). Under the CRA, as amended by FDIC regulations, a bank has
a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the
credit needs of its entire community, including low and moderate income neighborhoods. The CRA does
not establish specific lending requirements or programs for financial institutions nor does it limit an
institution’s discretion to develop the types of products and services that it believes are best suited to its
particular community. The CRA does require the FDIC, in connection with its examination of a bank, to
assess the bank’s record of meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such bank, including applications to acquire branches and other
financial institutions. The CRA requires the FDIC to provide a written evaluation of a bank’s CRA
performance utilizing a four-tiered descriptive rating system. In particular, the system focuses on three tests:
•
•
•
A lending test, to evaluate the bank’s record of making loans in its assessment areas;
An investment test, to evaluate the bank’s record of investing in community development projects,
affordable housing, and programs benefiting low or moderate income individuals and businesses;
and
A service test, to evaluate the bank’s delivery of services through its branches, ATMs, and other
offices.
Connecticut has its own statutory counterpart to the CRA which is applicable to the Bank. The
Connecticut version is generally similar to the CRA but utilizes a five-tiered descriptive rating system.
Connecticut law requires the Connecticut Department of Banking to consider, but not be limited to, a
bank’s record of performance under Connecticut law in considering any application by the Bank to
establish a branch or other deposit-taking facility, to relocate an office or to merge or consolidate with or
acquire the assets and assume the liabilities of any other banking institution. In our most recent evaluation
under Connecticut law both The Bank of New Canaan and The Bank of Fairfield received a CRA rating of
“satisfactory”.
Consumer Protection and Fair Lending Regulations. We are subject to a variety of federal and
Connecticut statutes and regulations that are intended to protect consumers and prohibit discrimination in
the granting of credit. These statutes and regulations provide for a range of sanctions for non-compliance
with their terms, including imposition of administrative fines and remedial orders, and referral to the
18
Attorney General for prosecution of a civil action for actual and punitive damages and injunctive relief.
Certain of these statutes authorize private individual and class action lawsuits and the award of actual,
statutory and punitive damages and attorneys’ fees for certain types of violations.
At the federal level, these laws include, among others, the following:
•
•
•
•
•
•
•
•
Federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to
enable the public and public officials to determine whether a financial institution is fulfilling its
obligation to help meet the housing needs of the community it serves;
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed, or other
prohibited factors in extending credit;
Fair Credit Reporting Act of 1978, governing the use of consumer credit reports and the provision
of information to credit reporting agencies;
Fair Debt Collection Act, governing the manner in which consumer debts may be collected by
collection agencies;
Real Estate Settlement Procedures Act, governing closing costs and settlement procedures and
disclosures to consumers related thereto;
Servicemembers Civil Relief Act of 2004, governing the repayment terms of, and property rights
underlying, secured obligations of persons in military service; and
Rules and regulations of
implementing these federal laws.
the various federal agencies charged with the responsibility of
Additional Considerations
Regulatory Enforcement Authority. Federal banking agencies have substantial enforcement authority
over the financial institutions that they regulate including, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against
banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions
may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or
inactions may provide the basis for enforcement action, including misleading or untimely reports filed with
regulatory authorities. Except under certain circumstances, federal law requires public disclosure of final
enforcement actions by the federal banking agencies.
Incentive Compensation Guidance. The federal banking agencies have released comprehensive
guidance on incentive compensation policies focused on ensuring that financial institutions’ incentive
compensation policies do not undermine the safety and soundness of those institutions by encouraging
excessive risk taking. The incentive compensation guidance sets expectations for financial institutions
concerning their incentive compensation arrangements and related risk-management, control and
governance processes. All employees that have the ability to materially affect the risk profile of a financial
institution, either individually or as part of a group, are covered by the guidance. The guidance is based
upon three core concepts: (1) balanced risk-taking incentives; (2) effective controls and risk management
compatibility; and (3) strong corporate governance. Deficiencies in compensation practices that are
identified may be incorporated into the institution’s supervisory ratings, which can affect the organization’s
ability to take certain actions, including ability to make acquisitions or take other actions. Enforcement
actions by the institution’s primary federal banking agency may be initiated if the institution’s incentive
compensation programs pose a risk to the safety and soundness of the organization.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 generally established a comprehensive
framework to modernize and reform the oversight of public company auditing, improve the quality and
transparency of financial reporting by those companies and strengthen the independence of auditors.
Among other things, the legislation (1) created the Public Company Accounting Oversight Board, which is
empowered to set auditing, quality control and ethics standards, to inspect registered public accounting
firms, to conduct investigations and to take disciplinary actions, subject to SEC oversight and review;
19
(2) strengthened auditor independence from corporate management by, among other things, limiting the
scope of consulting services that auditors can offer their public company audit clients; (3) heightened the
responsibility of public company directors and senior managers for the quality of the financial reporting
and disclosure made by their companies; (4) adopted a number of provisions to deter wrongdoing by
corporate management; (5) imposed a number of new corporate disclosure requirements; (6) adopted
provisions which generally seek to limit and expose to public view possible conflicts of interest affecting
securities analysts; and (7) imposed a range of new criminal penalties for fraud and other wrongful acts, as
well as extended the period during which certain types of lawsuits can be brought against a company or its
insiders. The Sarbanes-Oxley Act applies generally to all companies that file or are required to file periodic
reports with the SEC under the Exchange Act.
Financial Modernization. The Gramm-Leach-Bliley Act, or the GLB Act, permits greater affiliation
among banks, securities firms, insurance companies, and other companies under a type of financial services
company known as a “financial holding company”. A financial holding company essentially is a bank
holding company with significantly expanded powers. Financial holding companies are authorized by
statute to engage in a number of financial activities previously impermissible for bank holding companies,
including securities underwriting, dealing and market making; sponsoring mutual funds and investment
companies; insurance underwriting and agency; and merchant banking activities. The GLB also permits the
Federal Reserve Board and the Treasury Department to authorize additional activities for financial holding
companies if they are “financial in nature” or “incidental” to financial activities. A bank holding company
may become a financial holding company if each of its subsidiary banks is well capitalized, well managed,
and has at least a “satisfactory” CRA rating. A financial holding company must provide notice to the
Federal Reserve Board within 30 days after commencing activities previously determined by statute or by
the Federal Reserve Board and Department of the Treasury to be permissible. We have not submitted notice
to the Federal Reserve Board of our intent to be deemed a financial holding company. However, we are not
precluded from submitting a notice in the future should we wish to engage in activities only permitted to
financial holding companies.
Privacy Requirements. Under the Gramm-Leach-Bliley Act, or the GLB Act, all financial institutions
are required to establish policies and procedures to restrict the sharing of non-public customer data with
non-affiliated parties and to protect customer data from unauthorized access. In addition, the Fair Credit
Reporting Act of 1970, or FCRA, includes many provisions concerning national credit reporting standards
and permits consumers, including customers of the Bank, to opt out of information-sharing for marketing
purposes among affiliated companies. The Fair and Accurate Credit Transactions Act of 2004 amended
certain provisions of FCRA and requires banks and other financial institutions to notify their customers if
they report negative information about them to a credit bureau or if they are granted credit on terms less
favorable than those generally available. The Bank currently has a privacy protection policy in place and
believes such policy is in compliance with the regulations.
The Bank Secrecy Act and Related Anti-Money Laundering and Anti-Terrorist Financing
Legislation. The Bank Secrecy Act, or the BSA, provides, in part, for the facilitation of information
sharing among governmental entities and financial institutions for the purpose of combating terrorism and
money laundering by enhancing anti-money laundering and financial transparency laws, as well as
enhanced information collection tools and enforcement mechanics for the U.S. government, including:
(1) requiring standards for verifying customer identification at account opening; (2) rules to promote
cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that
may be involved in terrorism or money laundering; (3) reports by nonfinancial trades and businesses filed
with the Treasury Department’s Financial Crimes Enforcement Network for transactions exceeding
$10,000; (4) filing suspicious activities reports by brokers and dealers if they believe a customer may be
violating U.S. laws and regulations; and (5) requiring enhanced due diligence requirements for financial
institutions that administer, maintain, or manage private bank accounts or correspondent accounts for
non-U.S. persons.
Title III of the USA PATRIOT Act of 2001 amended the BSA and incorporates anti-terrorist
financing provisions into the requirements of the BSA and its implementing regulations. Among other
things, the USA PATRIOT Act requires all financial institutions, including us, to institute and maintain a
risk-based anti-money laundering compliance program that includes a customer identification program,
20
provides for information sharing with law enforcement and between certain financial institutions by means
of an exemption from the privacy provisions of the GLB Act, prohibits U.S. banks and broker-dealers from
maintaining accounts with foreign “shell” banks, establishes due diligence and enhanced due diligence
requirements for certain foreign correspondent banking and foreign private banking accounts and imposes
additional record keeping requirements for certain correspondent banking arrangements. The USA
PATRIOT Act also grants broad authority to the Secretary of the Treasury to take actions to combat
money laundering, and federal bank regulators are required to evaluate the effectiveness of an applicant in
combating money laundering in determining whether to approve any application submitted by a financial
institution.
The Office of Foreign Assets Control, or OFAC, which is a division of the Treasury Department, is
responsible for helping to ensure that U.S. entities do not engage in transactions with “enemies” of the
United States, as defined by various Executive Orders and Acts of Congress. OFAC has sent, and will send,
our banking regulatory agencies lists of names of persons and organizations suspected of aiding, harboring
or engaging in terrorist acts. If the Bank finds a name on any transaction, account or wire transfer that is
on an OFAC list, the Bank must freeze such account, file a suspicious activity report and notify OFAC. We
have established policies and procedures to ensure compliance with the federal anti-laundering provisions.
Proposed Legislation and Regulatory Action. New statutes, regulations and guidance are regularly
proposed that contain wide-ranging potential changes to the statutes, regulations and competitive
relationships of financial institutions operating and doing business in the United States. We cannot predict
whether or in what form any proposed regulation or statute will be adopted or the extent to which our
business may be affected by any new regulation or statute.
Effect of Governmental Monetary Policies. Our earnings will be affected by domestic economic
conditions and the monetary and fiscal policies of the U.S. government and its agencies. The Federal
Reserve Board’s monetary policies have had, and are likely to continue to have, an important impact on the
operating results of commercial banks through its power to implement national monetary policy in order,
among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve
Board affect the levels of bank loans, investments and deposits through its control over the issuance of U.S.
government securities, its regulation of the discount rate applicable to member banks and its influence over
reserve requirements to which member banks are subject. We cannot predict the nature or impact of future
changes in monetary and fiscal policies.
Taxation
Federal Taxation
General: We are subject to federal income taxation in the same general manner as other corporations,
with limited exceptions. The following discussion of federal taxation is intended only to summarize certain
pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to
us.
Method of Accounting: For Federal income tax purposes, we report income and expenses on the
accrual method of accounting and use tax year ending December 31 for filing federal income tax returns.
Alternative Minimum Tax: The Internal Revenue Code of 1986, as amended (the “Code”), imposes
an alternative minimum tax (“AMT”) at a rate of 20.0% on a base of regular taxable income plus certain
tax preferences which we refer to as “alternative minimum taxable income.” The AMT is payable to the
extent such alternative minimum taxable income is in excess of an exemption amount and the AMT exceeds
the regular income tax. Net operating losses can offset no more than 90.0% of alternative minimum taxable
income. Certain AMT payments may be used as credits against regular tax liabilities in future years. We
have not been subject to the AMT and have no such amounts available as credits for carryover.
Net Operating Loss Carryovers: A corporation may carry back net operating losses to the preceding
two taxable years and forward to the succeeding 20 taxable years. At December 31, 2014, we had $3.2
million of net operating loss carryforwards for federal income tax purposes. The carryovers were transferred
to the Company upon the merger with the Wilton Bank.
21
Corporate Dividends-Received Deduction: The Company may exclude from its income 100.0% of
dividends received from the Bank as a member of the same affiliated group of corporations. The corporate
dividends received deduction is 80.0% in the case of dividends received from corporations with which a
corporate recipient does not file a consolidated tax return, and corporations which own less than 20.0% of
the stock of a corporation distributing a dividend may deduct only 70.0% of dividends received or accrued
on their behalf.
The Company and the Bank are not currently under audit with respect to their federal tax returns. In
the past five years, an audit of the Company’s 2009 federal tax return was conducted, there were no findings
as a result of the audit.
State Taxation
Connecticut
We are subject to the Connecticut corporation business tax. The Connecticut corporation business tax
is based on the federal taxable income before net operating loss and special deductions and makes certain
modifications to federal taxable income to arrive at Connecticut taxable income. Connecticut taxable
income is multiplied by the state tax rate (7.5% for the fiscal years ending December 31, 2014 and 2013) to
arrive at Connecticut income tax.
The Company and the Bank are not currently under audit with respect to their state tax returns, and
their state tax returns have not been audited for the past five years.
22
Item 1A. Risk Factors
Risks Relating to Our Business
As a business operating in the financial services industry, our business and operations may be adversely
affected in numerous and complex ways by weak economic conditions.
Our businesses and operations, which primarily consist of lending money to customers in the form of
loans, borrowing money from customers in the form of deposits and investing in securities, are sensitive to
general business and economic conditions in the United States. If the U.S. economy weakens, our growth
and profitability from our lending, deposit and investment operations could be constrained. Uncertainty
about the federal fiscal policymaking process, the medium and long term fiscal outlook of the federal
government, and future tax rates is a concern for businesses, consumers and investors in the United States.
In addition, economic conditions in foreign countries, including uncertainty over the stability of the euro
currency, could affect the stability of global financial markets, which could hinder U.S. economic growth.
Weak economic conditions are characterized by deflation, fluctuations in debt and equity capital markets, a
lack of
increased
delinquencies on mortgage, consumer and commercial loans, residential and commercial real estate price
declines and lower home sales and commercial activity. The current economic environment is also
characterized by interest rates at historically low levels, which impacts our ability to attract deposits and to
generate attractive earnings through our investment portfolio. All of these factors are detrimental to our
business, and the interplay between these factors can be complex and unpredictable. Our business is also
significantly affected by monetary and related policies of the U.S. federal government and its agencies.
Changes in any of these policies are influenced by macroeconomic conditions and other factors that are
beyond our control. Adverse economic conditions and government policy responses to such conditions
could have a material adverse effect on our business, financial condition, results of operations and
prospects.
liquidity and/or depressed prices in the secondary market
for mortgage loans,
We may not be able to adequately measure and limit our credit risk, which could lead to unexpected losses.
The business of lending is inherently risky, including risks that the principal of or interest on any loan
will not be repaid timely or at all or that the value of any collateral supporting the loan will be insufficient
to cover our outstanding exposure. These risks may be affected by the strength of the borrower’s business
sector and local, regional and national market and economic conditions. Our risk management practices,
such as monitoring the concentration of our loans within specific industries and our credit approval
practices, may not adequately reduce credit risk, and our credit administration personnel, policies and
procedures may not adequately adapt to changes in economic or any other conditions affecting customers
and the quality of the loan portfolio. Finally, many of our loans are made to middle market businesses that
may be less able to withstand competitive, economic and financial pressures than larger borrowers. A failure
to effectively measure and limit the credit risk associated with our loan portfolio could have a material
adverse effect on our business, financial condition, results of operations and future prospects.
Our allowance for loan losses may not be adequate to absorb losses inherent in our loan portfolio, which could
have a material adverse effect on our financial condition and results of operations.
We maintain an allowance for loan losses to provide for nonperforming loans. Maintaining an
adequate allowance for loan losses is critical to our financial results and condition. The level of our
allowance for loan losses reflects management’s continuing evaluation of general economic conditions,
diversification and seasoning of the loan portfolio, historic loss experience, identified credit problems,
delinquency levels and adequacy of collateral. The determination of the appropriate level of the allowance
for loan losses is inherently highly subjective and requires us to make significant estimates of and
assumptions regarding current credit risks and future trends, all of which may undergo material changes.
Inaccurate management assumptions, continuing deterioration of economic conditions affecting borrowers,
new information regarding existing loans, identification of additional problem loans and other factors, both
within and outside of our control, may require us to increase our allowance for loan losses. In addition, our
regulators, as an integral part of their examination process, review our loans and the adequacy of our
allowance for loan losses and may direct us to make additions to our allowance for loan losses based on
23
their judgments about information available to them at the time of their examination. Further, if actual
charge-offs in future periods exceed the amounts allocated to our allowance for loan losses, we may need
additional provision for loan losses to restore the adequacy of our allowance for loan losses. If we are
required to materially increase our level of allowance for loan losses for any reason, such increase could
have a material adverse effect on our business, financial condition, results of operations and future
prospects.
At December 31, 2014, our allowance for loan losses as a percentage of total loans was 1.17% and as a
percentage of total non-accrual loans was 323.02%. Although we believe that our allowance for loan losses
is adequate to cover known and probable incurred losses included in the portfolio, we cannot assure you
that we will not further increase our allowance for loan losses or that our regulators will not require us to
increase it. Either of these occurrences could adversely affect our earnings. If delinquencies and defaults
increase, we could experience an increase in delinquencies and charge-offs and we may be required to
increase our allowance for loan losses, which could materially adversely affect our business, financial
condition, results of operations and prospects.
Our concentration of large loans to certain borrowers may increase our credit risk.
Our growth over the last several years has been partially attributable to our ability to originate and
retain loans. Many of these loans have been made to a small number of borrowers, resulting in a high
concentration of large loans to certain borrowers. We have established an informal, internal lending limit of
$25MM to one borrower/relationship subject to the statutory maximum of 15% of our unimpaired capital
and reserves for loan loss and up to 50% for commercial real estate-secured loans. However, we may, under
certain circumstances, consider going above this internal limit in situations where we are confident that
(1) the loan to value ratio, other characteristics or the structure of the loan is such that it is a lower risk than
standard, (2) we will be able to sell to another institution some portion of the relationship debt as either a
whole loan or participation, (3) there is sufficient diversification in the ownership structure of the proposed
borrowing entity that the involvement of one party to whom we have extended other debt will not
significantly negatively impact the proposed loan’s performance in a downturn or (4) the proposed loan is
secured by particularly strong collateral, for example, a commercial real estate loan secured by strong
tenants with long-term leases, thereby reducing the reliance on the principals of the borrowing entity. As of
December 31, 2014, our five largest relationships ranged from approximately $14.0 million to $27.7 million,
and comprised in the aggregate, approximately 11% of our loan portfolio. In addition to other typical risks
related to any loan, such as deterioration of the collateral securing the loans, this high concentration of
borrowers presents a risk to our lending operations. If any of one of these borrowers becomes unable to
repay their loan obligations for any reason, our nonperforming loans and our allowance for loan losses
could increase significantly, which could adversely and materially affect our business, financial condition
and results of operations.
Our commercial real estate loan, commercial loan and construction loan portfolios expose us to risks that may
be greater than the risks related to our other mortgage loans.
Our loan portfolio includes non-owner-occupied commercial real estate loans for individuals and
businesses for various purposes, which are secured by commercial properties. As of December 31, 2014, our
non-owner-occupied commercial real estate loans totaled $396.2 million, or 43% of our total loan portfolio.
There was 1 nonperforming non-owner-occupied commercial real estate loan totaling $3.2 million as of
December 31, 2014. These loans typically involve repayment dependent upon income generated, or expected
to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and
debt service. Commercial real estate loans may be affected to a greater extent than residential loans by
adverse conditions in real estate markets or the economy because commercial real estate borrowers’ ability
to repay their loans depends on successful development of their properties, in addition to the factors
affecting residential real estate borrowers. These loans also involve greater risk because they generally are
not fully amortizing over the loan period, but have a balloon payment due at maturity. A borrower’s ability
to make a balloon payment typically will depend on being able to either refinance the loan or sell the
underlying property in a timely manner.
These loans expose a lender to greater credit risk than loans secured by residential real estate because
the collateral securing these loans typically cannot be liquidated as easily as residential real estate. If we
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foreclose on these loans, our holding period for the collateral typically is longer than for a 1 – 4family
the collateral. Additionally,
residential property because there are fewer potential purchasers of
non-owner-occupied commercial real estate loans generally involve relatively large balances to single
borrowers or related groups of borrowers. Accordingly, charge-offs on non-owner-occupied commercial real
estate loans may be larger on a per loan basis than those incurred with our residential or consumer loan
portfolios.
Commercial loans are typically based on the borrowers’ ability to repay the loans from the cash flow of
their businesses. These loans may involve greater risk because the availability of funds to repay each loan
depends substantially on the success of the business itself. In addition, the assets securing the loans have the
following characteristics: (a) they depreciate over time, (b) they are difficult to appraise and liquidate, and
(c) they fluctuate in value based on the success of the business.
Risk of loss on a construction loan depends largely upon whether our initial estimate of the property’s
value at completion of construction equals or exceeds the cost of the property construction (including
interest), the availability of permanent takeout financing and the builder’s ability to ultimately sell the
property. During the construction phase, a number of factors can result in delays and cost overruns. If
estimates of value are inaccurate or if actual construction costs exceed estimates, the value of the property
securing the loan may be insufficient to ensure full repayment when completed through a permanent loan
or by seizure of collateral.
Our underwriting, review and monitoring cannot eliminate all of the risks related to these loans.
Unexpected deterioration in the credit quality of our commercial real estate loan, commercial loan or
construction loan portfolios would require us to increase our provision for loan losses, which would reduce
our profitability and could materially adversely affect our business, financial condition, results of
operations and future prospects.
Lack of seasoning of our loan portfolio could increase risk of credit defaults in the future.
As a result of our growth over the past recent years, a large portion of loans in our loan portfolio and
of our lending relationships are of relatively recent origin. As of December 31, 2014, we had $719.3 million
in commercial loans outstanding. Approximately 93%, or $667.5 million, of these loans, were originated in
the last four years. In general, loans do not begin to show signs of credit deterioration or default until they
have been outstanding for some period of time, a process referred to as “seasoning”. As a result, a portfolio
of older loans will usually behave more predictably than a newer portfolio. Because a large portion of our
portfolio is relatively new, the current level of delinquencies and defaults may not represent the level that
may prevail as the portfolio becomes more seasoned and may not serve as a reliable basis for predicting the
health and nature of our loan portfolio, including net charge-offs and the ratio of nonperforming assets in
the future. Our limited experience with these loans does not provide us with a significant payment history
pattern with which to judge future collectability. As a result, it may be difficult to predict the future
performance of our loan portfolio. If delinquencies and defaults increase, we could experience an increase
in delinquencies and charge-offs and we may be required to increase our allowance for loan losses, which
could materially adversely affect our business, financial condition, results of operations and prospects.
A prolonged downturn in the real estate market could result in losses and adversely affect our profitability.
As of December 31, 2014, approximately 84% of our loan portfolio was composed of commercial and
consumer real estate loans. The real estate collateral in each case provides an alternate source of repayment
in the event of default by the borrower and may deteriorate in value during the time the credit is extended.
The recent recession has adversely affected real estate market values across the country, and values may
continue to decline. A further decline in real estate values could further impair the value of our collateral
and our ability to sell the collateral upon any foreclosure, which would likely require us to increase our
provision for loan losses. In the event of a default with respect to any of these loans, the amounts we receive
upon sale of the collateral may be insufficient to recover the outstanding principal and interest on the loan.
If we are required to re-value the collateral securing a loan to satisfy the debt during a period of reduced
real estate values or to increase our allowance for loan losses, our profitability could be adversely affected,
which could have a material adverse effect on our business, financial condition, results of operations and
prospects.
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We are subject to interest rate risk that could negatively impact our profitability.
Our profitability, like that of most financial institutions, depends to a large extent on our net interest
income, which is the difference between our interest income on interest-earning assets, such as loans and
investment securities, and our interest expense on interest-bearing liabilities, such as deposits and
borrowings. Our interest rate sensitivity profile was liability sensitive as of December 31, 2014, meaning that
we estimate our net interest income would decrease more from rising interest rates than from falling interest
rates.
Interest rates are highly sensitive to many factors that are beyond our control, including general
economic conditions and policies of various governmental and regulatory agencies and, in particular, the
U.S. Federal Reserve Board, or the Federal Reserve, or the Federal Reserve Board. Changes in monetary
policy, including changes in interest rates, could influence not only the interest we receive on loans and
securities and the interest we pay on deposits and borrowings, but such changes could also affect our ability
to originate loans and obtain deposits, the fair value of our financial assets and liabilities, and the average
duration of our assets. If the interest rates paid on deposits and other borrowings increase at a faster rate
than the interest rates received on loans and other investments, our net interest income, and therefore net
income, could be adversely affected. A continuation of the current levels of historically low interest rates
could cause the spread between our loan yields and our deposit rates paid to compress our net interest
margin and our net income could be adversely affected. Further, any substantial, unexpected, prolonged
change in market interest rates could have a material adverse effect on our business, financial condition,
results of operations and future prospects.
In addition, an increase in interest rates could also have a negative impact on our results of operations
by reducing the ability of borrowers to repay their current loan obligations. These circumstances could not
only result in increased loan defaults, foreclosures and charge-offs, but also necessitate further increases to
our allowance for loan losses, each of which could have a material adverse effect on our business, results of
operations, financial condition and future prospects.
Our business is concentrated in Fairfield and New Haven Counties, Connecticut, and we are more sensitive
than our more geographically diversified competitors to adverse changes in the local economy.
We conduct substantially all of our operations in Fairfield and New Haven Counties, Connecticut.
Substantially all of the real estate loans in our loan portfolio are secured by properties located in Fairfield
County and a smaller number in New Haven County and the New York metropolitan area. In addition, as
of December 31, 2014, the vast majority of the loans in our loan portfolio (measured by dollar amount)
were made to borrowers who live or conduct business in the New York metropolitan area. We compete
against a number of financial institutions who maintain significant operations located outside of the New
York metropolitan area and outside the State of Connecticut. Accordingly, any regional or local economic
downturn, or natural or man-made disaster, that affects Connecticut or the New York metropolitan area or
existing or prospective property or borrowers in Connecticut or the New York metropolitan area may affect
us and our profitability more significantly and more adversely than our more geographically diversified
competitors, which could cause a material adverse effect on our business, financial condition, results of
operations and prospects.
Strong competition within our market area could reduce our profits and slow growth.
Competition in the financial services industry in our market and the surrounding area is strong.
Numerous commercial banks, savings banks and savings associations maintain offices or are headquartered
in or near our primary market area. Commercial banks, savings banks, savings associations, money market
funds, mortgage brokers, finance companies, credit unions, insurance companies, investment firms and
private lenders compete with us for various segments of our business. These competitors often have far
greater resources than we do and are able to conduct more intensive and broader based promotional efforts
to reach both commercial and individual customers.
Our ability to compete successfully will depend on a number of factors, including, among other things:
•
Our ability to build and maintain long-term customer relationships while ensuring high ethical
standards and safe and sound banking practices;
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•
•
•
•
The scope, relevance and pricing of products and services that we offer;
Customer satisfaction with our products and personalized services;
Industry and general economic trends; and
Our ability to keep pace with technological advances and to invest in new technology.
Increased competition could require us to increase the rates we pay on deposits or lower the rates we
offer on loans, which could reduce our profitability. We derive a majority of our business from our primary
market area, of Fairfield County, Connecticut, which includes the Town of New Canaan and the
neighboring communities of Wilton, Stamford, Fairfield, Easton, Weston and Westport as well as New
Haven County, Connecticut as a result of the Quinnipiac acquisition. Our failure to compete effectively in
our primary market could cause us to lose market share and could have a material adverse effect on our
business, financial condition, results of operations and future prospects.
We are a community bank and our ability to maintain our reputation is critical to the success of our business.
We are a community bank, and our reputation is one of the most valuable components of our business.
In September 2013, following the merger of The Bank of Fairfield into The Bank of New Canaan, we
combined these brands as well as Stamford First Bank under one single name, Bankwell Bank. Although
we believe that operating under a single name will help us to achieve operational efficiencies, strengthen our
brand and grow our institution, there can be no assurance that this brand change will be successful or that
integration of the banks will not compromise customer confidence or provide marketing opportunities for
our competitors. We strive to conduct our business in a manner that enhances our reputation. This is done,
in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of
the communities we serve, delivering superior service to our customers and caring about our customers and
associates. If our reputation is negatively affected, by the actions of our employees or otherwise, our
business and, therefore, our operating results may be materially adversely affected.
We may not be able to execute our management team’s growth strategy.
As part of our management team’s growth strategy, we pursue a business plan focused on the
development and growth of our franchise in our existing market and surrounding areas. In addition to
pursuing organic growth, a significant element of our management team’s strategy will be to acquire other
branches, whole financial institutions or related lines of business. We intend to actively seek potential
acquisition opportunities. There are numerous risks that may make it difficult for us to execute this growth
strategy and we cannot assure you that we will be successful in executing any part of our management
team’s strategy or that we will be able to maintain our historical rate of growth. Challenges we will face
include obtaining regulatory approvals with respect to acquisitions, assuring that we will not become
subject to regulatory actions in the future that could restrict our growth, identifying appropriate targets for
acquisitions, negotiating acquisitions on terms that are acceptable to us, and encountering competition for
acquisitions from financial institutions and other entities with similar business strategies that have greater
financial resources, relevant experience and more personnel than us. Accordingly, there can be no assurance
that we will be successful in completing future acquisitions at all or on terms that are acceptable to us. Our
ability to grow will be limited if we are unable to successfully make acquisitions in the future.
Some institutions we may acquire may have distressed assets and there can be no assurance that we would be
able to realize the value we predict from these assets or that we would make sufficient provision for future
losses in the value of, or accurately estimate the future write-downs taken in respect of, these assets.
The decline in home prices in many markets across the United States and weakening general economic
conditions may result in increases in delinquencies and losses in the loan portfolios and other assets of
financial institutions that we may acquire in amounts that exceed our initial forecasts developed during the
due diligence investigation prior to acquiring those institutions. In addition, the allowance for loan losses of
institutions we may acquire may prove inadequate or be negatively affected, and asset values may be
impaired, in the future due to factors we cannot predict, including significant deterioration in economic
conditions and further declines in collateral values and credit quality indicators. Any of these events could
adversely affect the financial condition, liquidity, capital position and value of any institutions that we
acquire and of the Bank as a whole.
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We may not be able to overcome the integration and other risks associated with acquisitions, which could
adversely affect our growth and profitability.
We may from time to time consider acquisition opportunities that we believe complement our activities
and have the ability to enhance our profitability. In addition to the Wilton Bank and Quinnipiac
transactions completed in 2013 and 2014, our acquisition activities could be material to our business and
involve a number of risks, including the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
incurring time and expense associated with identifying and evaluating potential acquisitions and
negotiating potential transactions, resulting in our attention being diverted from the operation of
our existing business;
using inaccurate estimates and judgments to evaluate credit, operations, management and market
risks with respect to the target institution or assets;
intense competition from other banking organizations and other inquirers for acquisitions;
potential exposure to unknown or contingent liabilities of banks and businesses we acquire;
the time and expense required to integrate the operations and personnel of the combined
businesses;
experiencing higher operating expenses relative to operating income from the new operations;
creating an adverse short-term effect on our results of operations;
losing key employees and customers as a result of an acquisition that is poorly received;
significant problems relating to the conversion of the financial and customer data of the entity;
inconsistencies in standards, controls, procedures and policies that adversely affect our ability to
maintain relationships with clients, customers, depositors and employees or to achieve the
anticipated benefits of the acquisition;
diversion of our management’s attention and resources;
integration of acquired customers into our financial and customer product systems; or
risks of impairment to goodwill or other than temporary impairment.
Depending on the condition of any institution or assets or liabilities that we may acquire, that
acquisition may, at least in the near term, adversely affect our capital and earnings and, if not successfully
integrated with our organization, may continue to have such effects over a longer period. We may not be
successful in overcoming these risks or any other problems encountered in connection with pending or
potential acquisitions, and any acquisition we may consider will be subject to prior regulatory approval.
Our inability to overcome these risks could have an adverse effect on our profitability, return on equity and
return on assets, our ability to implement our business strategy and enhance shareholder value, which, in
turn, could have a material adverse effect on our business, financial condition, results of operations and
prospects. Further, if we experience difficulties with the integration process, the anticipated benefits of the
investment or acquisition transaction may not be realized fully or at all or may take longer to realize than
expected. For instance, we do not yet know the full impact of our transactions with the Wilton Bank and
Quinnipiac Bank and Trust Company.
As a result of an investment or acquisition transaction, we may be required to take write-downs or write-offs,
restructuring and impairment or other charges that could have a significant negative effect on our financial
condition and results of operations, which could cause you to lose some or all of your investment.
We must conduct due diligence investigations of target institutions we intend to acquire. Intensive due
diligence is time consuming and expensive due to the operations, accounting, finance and legal professionals
who must be involved in the due diligence process. Even if we conduct extensive due diligence on a target
institution with which we combine, this diligence may not reveal all material issues that may affect a
particular target institution, and factors outside the control of the target institution and outside of our
control may later arise. If, during our diligence process, we fail to identify issues specific to a target
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institution or the environment in which the target institution operates, we may be forced to later write down
or write off assets, restructure our operations, or incur impairment or other charges that could result in our
reporting losses. These charges may also occur if we are not successful in integrating and managing the
operations of the target institution with which we combine. In addition, charges of this nature may cause us
to violate net worth or other covenants to which we may be subject as a result of assuming preexisting debt
held by a target institution or by virtue of our obtaining debt financing.
Resources could be expended in considering or evaluating potential acquisitions that are not consummated,
which could materially and adversely affect subsequent attempts to locate and acquire or merge with another
business.
We anticipate that the process of identifying and investigating institutions for potential acquisitions
and the negotiation, drafting and execution of relevant agreements, disclosure documents and other
instruments will require substantial management time and attention and substantial costs for accountants,
attorneys and others. If a decision is made not to complete a specific acquisition transaction, the costs
incurred up to that point for the proposed transaction likely would not be recoverable. Furthermore, even if
an agreement is reached relating to a specific target institution, we may fail to consummate the transaction
for any number of reasons, including those beyond our control. Any such event will result in a loss to us of
the related costs incurred, which could materially and adversely affect subsequent attempts to locate and
acquire or merge with another institution.
Our lending limit may restrict our growth and prevent us from effectively implementing our business strategy.
We are limited in the amount we can loan to a single borrower by the amount of our capital. Under
Connecticut banking law, the total direct or indirect liabilities of any one obligor that are not fully secured,
however incurred, to any Connecticut bank, exclusive of such bank’s investment in the investment securities
of such obligor, shall not exceed at the time incurred 15% of the equity capital and reserves for loan and
lease losses of such bank. The total direct or indirect liabilities of any one obligor that are fully secured,
however incurred, to any Connecticut bank, exclusive of such bank’s investment in the investment securities
of such obligor, shall not exceed at the time incurred 10% of the equity capital and reserves for loan and
lease losses of such bank, provided this limitation shall be separate from and in addition to the limitation
on liabilities that are not fully secured. We have also established an informal, internal lending limit of
$25MM to one borrower/relationship subject to the statutory maximum of 15% of our unimpaired capital
and reserves for loan loss and up to 50% for commercial real estate-secured loans. Based upon our current
capital levels and our informal, internal limit on loans, the amount we may lend both in the aggregate and
to any one borrower is significantly less than that of many of our competitors and may discourage potential
borrowers who have credit needs in excess of our lending limit from doing business with us. We
accommodate larger loans by selling participations in those loans to other financial institutions, but this
strategy may not always be available. If we are unable to compete effectively for loans from our target
customers, we may not be able to effectively implement our business strategy, which could have a material
adverse effect on our business, financial condition, results of operations and future prospects.
Regulatory changes allowing the payment of interest on commercial accounts may negatively affect our
deposits and our net interest income.
Our noninterest-bearing commercial accounts lower our cost of funds. One of the changes imposed by
The Dodd-Frank Act permits the payment of interest on such accounts, which was previously prohibited. If
we determine to make available interest-bearing commercial accounts, this will increase our interest expense
and our cost of funds and, as a result, decrease our net interest income which would adversely impact our
results of operations.
We are dependent on our executive management team and other key employees and we could be adversely
affected by the unexpected loss of their services.
We are led by an experienced core management team with substantial experience in the market that we
serve, and our operating strategy focuses on providing products and services through long-term relationship
managers. Accordingly, our success depends in large part on the performance of our key personnel, as well
as on our ability to attract, motivate and retain highly qualified senior and middle management.
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Competition for employees is intense, and the process of locating key personnel with the combination of
skills and attributes required to execute our business plan may be lengthy. In particular, we believe that
retaining the services and skills of our management team, including Mr. Gruseke, Ms. DeWyngaert,
Ms. Brathwaite and Mr. Verrico is important to our success. The unexpected loss of services of any of these
or other key personnel could have an adverse impact on us because of their skills, knowledge of our market,
years of industry experience and the difficulty of promptly finding qualified replacement personnel. If the
services of any of our key personnel should become unavailable for any reason, we may not be able to
identify and hire qualified persons on terms acceptable to us, which could cause a material adverse effect on
our business, financial condition, results of operations and prospects.
The fair value of our investment securities can fluctuate due to factors outside of our control.
As of December 31, 2014, the fair value of our investment securities portfolio was approximately $76.5
million. Factors beyond our control can significantly influence the fair value of securities in our portfolio
and can cause potential adverse changes to the fair value of these securities. These factors include, but are
not limited to, rating agency actions in respect of the securities, defaults by the issuer or with respect to the
underlying securities, and changes in market interest rates and continued instability in the capital markets.
Any of these factors, among others, could cause other-than-temporary impairments and realized and/or
unrealized losses in future periods and declines in other comprehensive income, which could materially and
adversely affect our business, results of operations, financial condition and prospects. The process for
determining whether impairment of a security is other-than-temporary usually requires complex, subjective
judgments about the future financial performance and liquidity of the issuer and any collateral underlying
the security in order to assess the probability of receiving all contractual principal and interest payments on
the security.
We may be required to repurchase mortgage loans or indemnify buyers against losses in some circumstances,
which could harm liquidity, results of operations and financial condition.
When mortgage loans are sold, whether as whole loans or pursuant to a securitization, we are required
to make customary representations and warranties to purchasers, guarantors and insurers,
including
government-sponsored entities, about the mortgage loans and the manner in which they were originated.
Whole loan sale agreements require us to repurchase or substitute mortgage loans, or indemnify buyers
against losses, in the event we breach these representations or warranties. In addition, we may be required to
repurchase mortgage loans as a result of early payment default of the borrower on a mortgage loan. If
repurchase and indemnity demands increase and such demands are valid claims and are in excess of our
provision for potential losses, our liquidity, results of operations and financial condition may be adversely
affected.
Our financial results depend on management’s selection of accounting methods and certain assumptions and
estimates.
Our financial condition and results of operations are based on our consolidated financial statements,
which have been prepared in accordance with Accounting Principles Generally Accepted in the United
States, or GAAP, and with general practices within the financial services industry. The preparation of
financial statements in conformity with GAAP requires us to make estimates and assumptions that affect
the reported amounts of certain assets and liabilities, disclosure of contingent assets and liabilities and the
reported amount of related revenues and expenses. Certain accounting policies inherently are based to a
greater extent on estimates, assumptions and judgments of management and, as such, have a greater
possibility of producing results that could be materially different than originally reported. They require
management to make subjective or complex judgments, estimates or assumptions, and changes in those
estimates or assumptions could have a significant impact on our consolidated financial statements. These
critical accounting policies include the fair value of acquired assets, the allowance for loan losses,
stock-based compensation and derivative instrument valuation. Because of the uncertainty of estimates
involved in these matters, we may be required to significantly increase the allowance for loan losses or
sustain loan losses that are significantly higher than the reserve provided or otherwise incur charges that
could have a material adverse effect on our business, financial condition, results of operations and future
prospects.
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We may be adversely affected by the soundness of other financial institutions.
Our ability to engage in routine funding transactions could be adversely affected by the actions and
commercial soundness of other financial institutions. Financial services companies are interrelated as a
result of trading, clearing, counterparty, and other relationships. We have exposure to different industries
and counterparties, and through transactions with counterparties in the financial services industry,
including broker-dealers, commercial banks, investment banks, and other financial intermediaries. Further,
our private banking channel relies on relationships with a number of other financial institutions for
referrals. As a result, declines in the financial condition of, or even rumors or questions about, one or more
financial institutions, financial service companies or the financial services industry generally, may lead to
market-wide liquidity, asset quality or other problems and could lead to losses or defaults by us or by other
institutions. These problems, losses or defaults could have a material adverse effect on our business,
financial condition, results of operations and future prospects.
We rely on third parties to provide key components of our business infrastructure, and failure of these parties
to perform for any reason could disrupt our operations.
Our business depends on the successful and uninterrupted functioning of our information technology
and telecommunications systems and third-party servicers. The failure of these systems, or the termination
of a third-party software license or service agreement on which any of these systems is based, could
interrupt our operations. Because our information technology and telecommunications systems interface
with and depend on third-party systems, we could experience service denials if demand for such services
exceeds capacity or such third-party systems fail or experience interruptions. If significant, sustained or
repeated, a system failure or service denial could compromise our ability to operate effectively, damage our
reputation, result in a loss of customer business, and subject us to additional regulatory scrutiny and
possible financial liability, any of which could have a material adverse effect on our business, financial
condition, results of operations and prospects.
We face various technological risks that could adversely affect our business.
We rely on communication and information systems to conduct business. Potential
failures,
interruptions or breaches in system security could result in disruptions or failures in our key systems, such
as general ledger, deposit or loan systems. The risk of electronic fraudulent activity within the financial
services industry, especially in the commercial banking sector due to cyber criminals targeting bank
accounts and other customer information is on the rise. We have developed policies and procedures aimed
at preventing and limiting the effect of failure, interruption or security breaches, including cyber-attacks of
information systems; however, there can be no assurance that these incidences will not occur, or if they do
occur, that they will be appropriately addressed. The occurrence of any failures, interruptions or security
breaches, including cyber-attacks of our information systems could damage our reputation, result in the
loss of business, subject us to increased regulatory scrutiny or subject us to civil litigation and possible
financial liability, any of which could have an adverse effect on our results of operation and financial
condition.
We are subject to losses due to fraudulent and negligent acts on the part of loan applicants, our borrowers,
other vendors and our employees.
When we originate mortgage loans, we rely heavily upon information supplied by third parties,
including the information contained in the loan application, property appraisal, title information and
employment and income documentation. If any of
this information is intentionally or negligently
misrepresented and such misrepresentation is not detected prior to loan funding, the value of the loan may
be significantly lower than expected. Whether a misrepresentation is made by the loan applicant, the
borrower, another third party or one of our employees, we generally bear the risk of loss associated with the
misrepresentation. A loan subject to a material misrepresentation is typically unsaleable or subject to
repurchase if it is sold prior to detection of the misrepresentation, and the persons and entities involved are
often difficult to locate and it is often difficult to collect any monetary losses that we have suffered from
them. We have controls and processes designed to help us identify misrepresented information in our loan
origination operations. We cannot assure you, however,
that we have detected or will detect all
misrepresented information in our loan originations.
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Unauthorized access, cyber-crime and other threats to data security may require significant resources, harm
our reputation, and adversely affect our business.
We necessarily collect, use and hold personal and financial information concerning individuals and
businesses with which we have a banking relationship. Threats to data security, including unauthorized
access, and cyber-attacks, rapidly emerge and change, exposing us to additional costs for protection or
remediation and competing time constraints to secure our data in accordance with customer expectations
and statutory and regulatory privacy and other requirements. It is difficult or impossible to defend against
every risk being posed by changing technologies, as well as criminal intent on committing cyber-crime.
Increasing sophistication of cyber-criminals and terrorists make keeping up with new threats difficult and
could result in a breach. Controls employed by our information technology department and our other
employees and vendors could prove inadequate. We could also experience a breach due to intentional or
negligent conduct on the part of employees or other internal sources, software bugs or other technical
malfunctions, or other causes. As a result of any of these threats, our customer accounts may become
vulnerable to account takeover schemes or cyber-fraud. Our systems and those of our third-party vendors
may also become vulnerable to damage or disruption due to circumstances beyond our or their control,
such as from catastrophic events, power anomalies or outages, natural disasters, network failures, and
viruses and malware.
A breach of our security that results in unauthorized access to our data could expose us to a disruption
or challenges relating to our daily operations as well as to data loss, litigation, damages, fines and penalties,
significant increases in compliance costs, and reputational damage, any of which could have a material
adverse effect on our business, results of operations, financial condition and future prospects.
We are subject to environmental liability risk associated with our lending activities.
In the course of our business, we may purchase real estate, or we may foreclose on and take title to real
estate. As a result, we could be subject to environmental liabilities with respect to these properties. We may
be held liable to a governmental entity or to third parties for property damage, personal injury, investigation
and clean-up costs incurred by these parties in connection with environmental contamination or may be
required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The
costs associated with investigation or remediation activities could be substantial. In addition, if we are the
owner or former owner of a contaminated site, we may be subject to common law claims by third parties
based on damages and costs resulting from environmental contamination emanating from the property. Any
significant environmental
liabilities could cause a material adverse effect on our business, financial
condition, results of operations and future prospects.
Risks Applicable to the Regulation of our Industry
We operate in a highly regulated environment, which could have a material and adverse impact on our
operations and activities, financial condition, results of operations, growth plans and future prospects.
Banking is highly regulated under federal and state law. We are subject to extensive regulation and
supervision that governs almost all aspects of our operations. As a registered bank holding company, we are
subject to supervision, regulation and examination by the Federal Reserve. As a commercial bank chartered
under the laws of Connecticut, the Bank is subject to supervision, regulation and examination by the State
of Connecticut Department of Banking and the FDIC.
The primary goals of the bank regulatory system are to maintain a safe and sound banking system and
to facilitate the conduct of sound monetary policy. This system is intended primarily for the protection of
the FDIC’s Deposit Insurance Fund and bank depositors, rather than our shareholders and creditors. The
banking agencies have broad enforcement power over bank holding companies and banks, including the
authority, among other things, to enjoin “unsafe or unsound” practices, require affirmative action to correct
any violation or practice, issue administrative orders that can be judicially enforced, direct increases in
capital, direct the sale of subsidiaries or other assets, limit dividends and distributions, restrict growth,
assess civil monetary penalties, remove officers and directors, and, with respect to banks, terminate our
charter, terminate our deposit insurance or place the Bank into conservatorship or receivership. In general,
these enforcement actions may be initiated for violations of laws and regulations or unsafe or unsound
practices.
32
Compliance with the myriad laws and regulations applicable to our organization can be difficult and
costly. In addition, these laws, regulations and policies are subject to continual review by governmental
authorities, and changes to these laws, regulations and policies, including changes in interpretation or
implementation of these laws, regulations and policies, could affect us in substantial and unpredictable ways
and often impose additional compliance costs. Further, any new laws, rules and regulations, such as the
Dodd-Frank Act, could make compliance more difficult or expensive. All of these laws and regulations, and
the supervisory framework applicable to our industry, could have a material adverse impact on our
operations and activities, financial condition, results of operations, growth plans and future prospects.
Federal and state regulators periodically examine our business and we may be required to remediate adverse
examination findings.
The Federal Reserve, the FDIC and the Connecticut Department of Banking periodically examine our
business, including our compliance with laws and regulations. If, as a result of an examination, a regulatory
agency were to determine that our financial condition, capital resources, asset quality, earnings prospects,
management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we
were in violation of any law or regulation, it may take a number of different remedial actions as it deems
appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative
action to correct any conditions resulting from any violation or practice, to issue an administrative order
that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil
monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded
that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our
deposit insurance and place us into receivership or conservatorship. Any regulatory action against us could
have a material adverse effect on our business, results of operations, financial condition and future
prospects.
The Bank’s FDIC deposit insurance premiums and assessments may increase.
The deposits of the Bank are insured by the FDIC up to legal limits and, consequently, subject it to the
payment of FDIC deposit insurance assessments. The Bank’s regular assessments are determined by its risk
classification, which is based on its regulatory capital levels and the level of supervisory concern that it
poses. The Deposit Insurance Fund has been put under significant pressure as a result of the financial crisis
that began in 2008. The FDIC increased deposit insurance assessment rates and charged a special
assessment to all FDIC-insured financial institutions, in order to maintain a strong funding position and
restore the reserve ratios of the Deposit Insurance Fund. Any future special assessments, increases in
assessment rates or required prepayments in FDIC insurance premiums could reduce our profitability or
limit our ability to pursue certain business opportunities, which could materially and adversely affect our
business, financial condition, results of operations and prospects.
New capital rules that were recently issued generally require insured depository institutions and their holding
companies to hold more capital. The impact of the new rules on our financial condition and operations is
uncertain but could be materially adverse.
On July 2, 2013, the Federal Reserve adopted a final rule for the Basel III capital framework and, on
July 9, 2013, the OCC also adopted a final rule and the FDIC adopted the same provisions in the form of
an “interim final rule”. These rules substantially amend the regulatory risk-based capital rules applicable to
us. The rules phase in overtime beginning in 2015 and will become fully effective in 2019. The rules apply to
the Company as well as the Bank. See “Supervision and Regulation” under Item I Business for further
details.
The federal banking agencies have proposed new liquidity standards that could result in our having to lengthen
the term of our funding, restructure our business lines by forcing us to seek new sources of liquidity for them,
and/or increase our holdings of liquid assets.
As part of the Basel III capital process, the Basel Committee on Banking Supervision has finalized a
new liquidity standard, a liquidity coverage ratio, which requires a banking organization to hold sufficient
“high quality liquid assets” to meet liquidity needs for a 30 calendar day liquidity stress scenario. A net
stable funding ratio, which imposes a similar requirement over a one-year period, is under consideration.
33
The U.S. banking regulators have proposed a liquidity coverage ratio for systemically important banks.
Although the proposal would not apply directly to us, the substance of the proposal may inform the
regulators’ assessment of our liquidity. We could be required to reduce our holdings of illiquid assets, which
may adversely affect our results and financial condition.
The Bank may become subject to further reporting requirements under FDIC regulations.
We are subject to further reporting requirements under the rules of the FDIC for the year ended
December 31, 2015 as the Bank’s total assets exceeded $1.0 billion, including a requirement for management
to prepare a report that contains an assessment by management of the Bank’s effectiveness of internal
control structure and procedures for financial reporting as of the end of such fiscal year. In addition, we
will be required to obtain an independent public accountant’s attestation report concerning its internal
control structure over financial reporting. The rules for management to assess the Bank’s internal controls
over financial reporting are complex, and require significant documentation,
testing and possible
remediation. The effort to comply with regulatory requirements relating to internal controls will likely cause
us to incur increased expenses and will cause a diversion of management’s time and other internal resources.
If the Bank cannot favorably assess the effectiveness of its internal controls over financial reporting, or if its
independent registered public accounting firm is unable to provide an unqualified attestation report on the
Bank’s internal controls, the price of our common stock as well as investor confidence could be adversely
affected and we may be subject to additional regulatory scrutiny.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act,
or CRA, and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
Various laws impose nondiscriminatory lending requirements on financial institutions, including the
CRA, the Equal Credit Opportunity Act and the Fair Housing Act. A successful regulatory challenge to an
institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety
of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and
acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private
parties may also have the ability to challenge an institution’s performance under fair lending laws in private
class action litigation. Such actions could have a material adverse effect on our business, financial condition,
results of operations and prospects.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money
laundering statutes and regulations.
Financial
institutions are required to institute and maintain an effective anti-money laundering
program and file suspicious activity and currency transaction reports as appropriate under The Bank
Secrecy Act, The USA PATRIOT ACT of 2001 and certain other laws and regulations. Significant civil
penalties can be assessed by a variety of regulators and governmental agencies for violations of these laws
and regulations. If our policies, procedures and systems are deemed deficient, we would be subject to
liability, including fines and regulatory actions, which may include restrictions on our ability to pay
dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business
plan, including our acquisition plans. Failure to maintain and implement adequate programs to combat
money laundering and terrorist financing could also have serious reputational consequences for us. Any of
these results could materially and adversely affect our business, financial condition, results of operations
and prospects.
34
Item 1B. Unresolved Staff Comments
None.
Item 2.
Properties
The Bank’s main office is located at 208 Elm Street in New Canaan, Connecticut. The property is
leased by us until 2016, with three remaining five-year renewal options. In July 2012, we leased additional
space adjacent to 208 Elm Street at 220 Elm Street primarily for our executive management offices. The
initial term expires in 2018, with one five-year renewal option.
We also lease office space for each of our branch offices in New Canaan, Stamford, Fairfield and
North Haven Connecticut, and our loan production office in Bridgeport. The leases for our facilities have
terms expiring at dates ranging from 2015 to 2028, although certain of the leases contain options to extend
beyond these dates. We own the Wilton and Hamden branch offices. We believe that our current facilities
are adequate for our current level of operations. Each lease is at market rate based on similar properties in
the applicable market area. We believe that we have the necessary infrastructure in place to support our
projected growth.
Item 3.
Legal Proceedings
From time to time we are a party to various litigation matters incidental to the conduct of our
business. We are not presently party to any legal proceedings the resolution of which we believe would have
liquidity, results of
a material adverse effect on our business, future prospects, financial condition,
operation, cash flows or capital levels.
Item 4. Mine Safety Disclosures
Not applicable.
35
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
The Company’s Common Stock has traded on the NASDAQ Global Market under the Symbol
“BWFG” since the completion of its initial public offering on May 15, 2014.
Prior to the initial public offering, our common stock was quoted on the OTC Bulletin Board, or
OTCBB, under the symbol “BWFG”. High and low bid prices reported on the OTCBB reflect inter-dealer
quotations without retail markup, markdown or commissions, and may not necessarily represent actual
transactions.
The following table sets forth the high and low sales price and the dividends per share of the
Company’s Common Stock for the last two fiscal years for each quarter as reported on the NASDAQ
Global Market subsequent to the initial public offering and on the OTCBB based upon information
provided by OTCBBB or other reliable sources prior to the initial public offering.
Quarter Ended
December 31, 2014
December 31, 2013
Sales Price
High
Low
Cash
Dividends
Declared
Sales Price
High
Low
Cash
Dividends
Declared
March 31 . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30 . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30 . . . . . . . . . . . . . . . . . . . . . . .
December 31 . . . . . . . . . . . . . . . . . . . . . . .
$22.00
17.40
18.99
21.00
$18.80
16.55
18.75
20.60
$ — $22.00
23.00
23.00
22.00
—
—
—
$13.50
20.00
19.00
19.00
$ —
—
—
—
There were approximately 341 shareholders of record of BWFG Common Stock as of December 31,
2014. This number does not reflect the number of persons or entities holding stock in nominee name
through banks, brokerage firms or other nominees.
The Company’s shareholders are entitled to dividends when and if declared by the board of directors,
out of funds legally available. The ability of the Company to pay dividends depends, in part, on the ability
of the Bank to pay dividends to the Company. In accordance with Connecticut statutes, regulatory approval
is required for the Bank to pay dividends in excess of the Bank’s profits retained in the current year plus
retained profits from the previous two years. The Bank is also prohibited from paying dividends that would
reduce its capital ratios below minimum regulatory requirements. The payment of dividends is subject to
additional restrictions in connection with the SBLF preferred stock.
Common Stock Performance Graph
The performance graph below compares the Company’s cumulative shareholder return on its common
stock since May 15, 2014, the IPO date to the cumulative return of the NASDAQ Composite Index and the
NASDAQ Bank Index. Cumulative return assumes the reinvestment of dividends, and is expressed in
dollars based on an assumed investment of $100.
There can be no assurance that our stock performance in the future will continue with the same or
similar trend depicted in the graph below. We will not make or endorse any predictions as to future stock
performance.
36
Bankwell Financial Group, Inc.
Total Return Performance
Bankwell Financial Group, Inc.
Nasdaq Composite Index
Nasdaq Bank Index
e
u
l
a
V
x
e
d
n
I
120.00
115.00
110.00
105.00
100.00
95.00
90.00
05/15/14
06/30/14
09/30/14
12/31/14
Index
05/15/14
06/30/14
09/30/14
12/31/14
Bankwell Financial Group, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . .
Nasdaq Composite Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nasdaq Bank Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.00
100.00
100.00
94.44
108.33
107.01
105.39
110.42
101.91
116.67
116.39
109.89
In accordance with the rules of the SEC, this section captioned “Common Stock Performance Graph”,
shall not be incorporated by reference into any of our future filings made under the Securities Exchange
Act of 1934 or the Securities Act of 1933. The Common Stock Performance Graph,
including its
accompanying table and footnotes, is not deemed to be soliciting material or to be filed under the Exchange
Act or the Securities Act.
Item 6.
Selected Financial Data
The following table sets forth selected consolidated financial data as of the dates and for the periods
presented. The selected consolidated statement of financial condition data as of December 31, 2014 and
2013 and the selected consolidated statement of income data for the years ended December 31, 2014, 2013
and 2012 have been derived mainly from our audited consolidated financial statements and related notes
that we have included elsewhere in this Annual Report. The selected consolidated statement of financial
condition data as of December 31, 2012, 2011 and 2010 and the selected consolidated statement of income
data for the years ended December 31, 2011 and 2010 have been derived mainly from audited consolidated
financial statements that are not presented in this Annual Report.
The selected historical consolidated financial data as of any date and for any period are not necessarily
indicative of the results that may be achieved as of any future date or for any future period. You should
read the following selected statistical and financial data in conjunction with the more detailed information
contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
and our consolidated financial statements and the related notes that we have presented elsewhere in this
Annual Report.
37
Statements of Income:
Interest income . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense
. . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . .
Net interest income after provision for loan losses . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . .
Income before income tax . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to common shareholders
. . .
Per Share Data:
Basic earnings per share . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . .
Book value per share (end of period)(a) . . . . . . . . . .
Tangible book value per share (end of period)(a)(b) . . .
Shares outstanding (end of period)(a)
. . . . . . . . . . .
Weighted average shares outstanding – basic . . . . . . .
Weighted average shares outstanding – diluted . . . . .
Performance Ratios:
Return on average assets(c) . . . . . . . . . . . . . . . . . .
Return on average common shareholders’ equity . . . .
Return on average shareholders’ equity(c) . . . . . . . . .
Average shareholders’ equity to average assets . . . . . .
Net interest margin . . . . . . . . . . . . . . . . . . . . . .
Efficiency ratio(b) . . . . . . . . . . . . . . . . . . . . . . . .
Asset Quality Ratios:
Total past due loans to total loans(d) . . . . . . . . . . . .
Nonperforming loans to total loans(d) . . . . . . . . . . .
Nonperforming assets to total assets(e)
. . . . . . . . . .
Allowance for loan losses to nonperforming loans . . .
Allowance for loan losses to total loans(d)
. . . . . . . .
Net (recoveries) charge-off’s to average loans(d) . . . . .
Statements of Financial Condition:
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets
Gross portfolio loans(d) . . . . . . . . . . . . . . . . . . . .
Investment securities
. . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital Ratios:
Tier 1 capital to average assets(f)
Bankwell Bank . . . . . . . . . . . . . . . . . . . . . . .
The Bank of New Canaan . . . . . . . . . . . . . . . .
The Bank of Fairfield . . . . . . . . . . . . . . . . . . .
Tier 1 capital to risk-weighted assets(f)
Bankwell Bank . . . . . . . . . . . . . . . . . . . . . . .
The Bank of New Canaan . . . . . . . . . . . . . . . .
The Bank of Fairfield . . . . . . . . . . . . . . . . . . .
Total capital to risk-weighted assets(f)
Bankwell Bank . . . . . . . . . . . . . . . . . . . . . . .
The Bank of New Canaan . . . . . . . . . . . . . . . .
The Bank of Fairfield . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity to total assets . . . . . . . . .
Tangible common equity ratio(b)
. . . . . . . . . . . . . .
2014
35,589
3,929
31,660
2,152
29,508
3,041
25,812
6,737
2,169
4,568
4,458
$
$
At or For the Years Ended December 31,
2011
2012
2013
(Dollars in thousands, except per share data)
$
$
28,092
2,765
25,327
585
24,742
4,723
22,120
7,345
2,184
5,161
5,050
$
$
24,397
3,192
21,205
1,821
19,384
345
17,858
1,871
657
1,214
1,082
$
$
20,587
2,870
17,717
1,049
16,668
1,134
14,601
3,201
997
2,204
1,998
2010
16,877
3,209
13,668
1,311
12,357
1,695
13,331
721
214
507
246
$
$
$
0.78
0.78
16.84
16.35
7,019,620
5,577,942
5,605,512
$
1.46
1.44
15.58
15.46
3,754,253
3,395,779
3,451,393
$
0.39
0.38
14.50
14.50
2,797,200
2,767,850
2,864,700
$
0.72
0.71
13.85
13.85
2,758,200
2,757,000
2,811,000
$
0.10
0.09
12.81
12.81
2,756,200
2,531,000
2,588,000
0.52%
5.13%
4.66%
11.14%
3.84%
69.09%
0.86%
0.36%
0.39%
323.02%
1.17%
(0.05)%
0.77%
9.68%
8.17%
9.32%
3.94%
75.71%
0.73%
0.16%
0.23%
835.69%
1.33%
0.03%
0.22%
2.73%
2.40%
9.34%
4.11%
82.76%
0.75%
0.75%
0.81%
200.84%
1.50%
0.07%
0.50%
6.70%
5.03%
10.01%
4.27%
78.50%
1.01%
1.01%
0.78%
171.88%
1.74%
0.02%
0.14%
0.75%
1.33%
10.37%
4.12%
84.93%
0.79%
0.79%
0.57%
239.23%
1.87%
0.09%
$1,099,531
929,762
76,463
835,439
129,000
129,210
$ 779,618
632,012
42,413
661,545
44,000
69,485
$ 610,016
530,050
46,412
462,081
91,000
51,534
$ 477,355
369,294
94,972
367,115
58,000
49,188
$ 395,708
288,425
58,152
309,137
44,000
40,354
7.91%
—%
—%
9.49%
—%
—%
10.74%
—%
—%
8.91%
7.45%
—%
7.88%
8.39%
—%
9.09%
10.80%
—%
10.34%
12.05%
8.45%
6.65%
—%
8.71%
11.30%
—%
11.07%
13.66%
—%
12.33%
14.91%
10.30%
8.00%
—%
8.15%
13.25%
—%
11.86%
16.41%
—%
13.12%
17.10%
10.20%
8.93%
11.12%
—%
—%
12.47%
—%
—%
13.55%
—%
—%
11.75%
10.47%
38
(a) Excludes preferred stock and unvested restricted stock awards.
(b) This measure is not a measure recognized under GAAP and is therefore considered to be a non-GAAP
financial measure. See “Non-GAAP Financial Measures” for a description of this measure and a
reconciliation of this measure to its most directly comparable GAAP measure.
(c) Calculated based on net income before preferred stock dividends.
(d) Calculated using the principal amounts outstanding on loans.
(e) Nonperforming assets consist of nonperforming loans and other real estate owned.
(f) Represents bank ratios. During 2013, The Bank of New Canaan and The Bank of Fairfield were
merged into Bankwell Bank.
NON-GAAP FINANCIAL MEASURES
We identify “efficiency ratio”, “tangible common equity ratio”, “tangible book value per share” and
“total revenue” as “non-GAAP financial measures.” In accordance with the SEC’s rules, we classify a
financial measure as being a non-GAAP financial measure if that financial measure excludes or includes
amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are
included or excluded, as the case may be, in the most directly comparable measure calculated and presented
in accordance with generally accepted accounting principles as in effect from time to time in the United
States in our statements of income, balance sheet or statements of cash flows. Non-GAAP financial
measures do not include operating and other statistical measures or ratios or statistical measures calculated
using exclusively either financial measures calculated in accordance with GAAP, operating measures or
other measures that are not non-GAAP financial measures or both.
The non-GAAP financial measures that we discuss in this annual report should not be considered in
isolation or as a substitute for the most directly comparable or other financial measures calculated in
accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures
that we discuss in this annual report may differ from that of other companies reporting measures with
similar names. You should understand how such other banking organizations calculate their financial
measures similar or with names similar to the non-GAAP financial measures we have discussed in this
annual report when comparing such non-GAAP financial measures.
Efficiency ratio is defined as non-interest expenses, less merger and acquisition related expenses and
other real estate owned expenses, divided by our operating revenue, which is equal to net interest income
plus non-interest income excluding gains and losses on sales of securities, gains and losses on other real
estate owned and gain on bargain purchase. In our judgment, the adjustments made to operating revenue
allow investors and analysts to better assess our operating expenses in relation to our core operating revenue
by removing the volatility that is associated with certain one-time items and other discrete items that are
unrelated to our core business.
less
Tangible common equity is defined as total shareholders’ equity, excluding preferred stock,
goodwill and other intangible assets. We believe that this measure is important to many investors in the
marketplace who are interested in changes from period to period in common shareholders’ equity exclusive
of changes in intangible assets. Goodwill, an intangible asset that is recorded in a purchase business
combination, has the effect of increasing both common equity and assets while not increasing our tangible
common equity or tangible assets.
Tangible common equity ratio is defined as the ratio of tangible common equity divided by total assets
less goodwill and other intangible assets. We believe that this measure is important to many investors in the
marketplace who are interested in relative changes from period to period in common equity and total assets,
each exclusive of changes in intangible assets. We believe that the most directly comparable GAAP financial
measure is total shareholders’ equity to total assets.
Tangible book value per share is defined as book value, excluding the impact of goodwill and other
intangible assets, if any, divided by shares of our common stock outstanding.
Total revenue is defined as the sum of net interest income before provision of loan losses and
noninterest income.
39
The information provided below presents a reconciliation of each of our non-GAAP financial
measures to the most directly comparable GAAP financial measure.
Efficiency Ratio
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: foreclosed real estate expenses . . . . . . . . . . . . . . . . . . . . . .
Less: merger and acquisition expenses . . . . . . . . . . . . . . . . . . . .
Adjusted noninterest expense (numerator) . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: gains (losses) on sales of securities . . . . . . . . . . . . . . . . . . .
Less: gains on sale of foreclosed real estate . . . . . . . . . . . . . . . . .
Less: gain on bargain purchase . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted operating revenue (denominator) . . . . . . . . . . . . . . . . . .
Efficiency ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible Common Equity and
Tangible Common Equity/Tangible Assets
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible Common shareholders’ equity . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible common shareholders’ equity to tangible assets . . . . . . . . .
Tangible Book Value per Share
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible common shareholders’ equity . . . . . . . . . . . . . . . . . . . . .
Common shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: shares of unvested restricted stock . . . . . . . . . . . . . . . . . . .
Common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Book value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: effects of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible Book Value per Common Share . . . . . . . . . . . . . . . . . . .
Total Revenue
Net Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest income as a percentage of total revenue . . . . . . . . . . . .
Return on Average Common Shareholders’ Equity
Net Income Attributable to Common Shareholders . . . . . . . . . . .
Total average shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . .
Less: average preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average common shareholders’ equity . . . . . . . . . . . . . . . . . . . . .
Return on Average Common Shareholders’ Equity . . . . . . . . . . . . .
40
Years Ended December 31,
2013
2012
2014
$
$
$
$
25,812
36
1,801
23,975
31,660
3,041
—
—
—
34,701
$
$
$
$
22,120
8
908
21,204
25,327
4,723
648
64
1,333
28,005
$
$
$
$
17,858
9
—
17,849
21,205
345
(18)
—
—
21,568
69.09%
75.71%
82.76%
$ 129,210
10,980
118,230
3,437
$ 114,793
$1,099,531
3,437
$1,096,094
$
69,485
10,980
58,505
481
$
58,024
$ 779,618
481
$ 779,137
$
51,534
10,980
40,554
—
$
40,554
$ 610,016
—
$ 610,016
10.47%
7.45%
6.65%
$ 129,210
10,980
118,230
3,437
$ 114,793
7,185,482
165,862
7,019,620
16.84
0.49
16.35
$
$
$
69,485
10,980
58,505
481
$
58,024
3,876,393
122,140
3,754,253
15.58
0.12
15.46
$
$
$
51,534
10,980
40,554
—
$
40,554
2,846,700
49,500
2,797,200
14.50
—
14.50
$
$
$
$
$
$
31,660
3,041
34,701
8.76%
4,458
97,921
10,980
86,941
$
$
$
$
25,327
4,723
30,050
15.72%
5,050
63,142
10,980
52,162
$
$
$
$
21,205
345
21,550
1.60%
1,082
50,572
10,980
39,592
5.13%
9.68%
2.73%
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section presents management’s perspective on our financial condition and results of operations. The
following discussion and analysis should be read in conjunction with the consolidated financial statements and
related notes contained elsewhere in this annual report. To the extent that this discussion describes prior
performance, the descriptions relate only to the periods listed, which may not be indicative of future financial
outcomes. In addition to historical information, this discussion contains forward-looking statements that
involve risks, uncertainties and assumptions that could cause results to differ materially from management’s
expectations. Factors that could cause such differences are discussed in the sections titled “Cautionary Note
Regarding Forward-Looking Statements” and “Risk Factors”. We assume no obligation to update any of these
forward-looking statements.
General
Bankwell Financial Group, Inc.
is a bank holding company headquartered in New Canaan,
Connecticut. Through our wholly owned subsidiary, Bankwell Bank, or the Bank, we serve small and
medium-sized businesses and retail customers in greater Fairfield County, Connecticut. We also serve
similar customers in greater New Haven County, Connecticut as a result of the merger with Quinnipiac
Bank and Trust Company. We have a history of building long-term customer relationships and attracting
new customers through what we believe is our strong customer service and our ability to deliver a diverse
product offering.
The following discussion and analysis presents our results of operations and financial condition on a
consolidated basis. However, because we conduct all of our material business operations through the Bank,
the discussion and analysis relates to activities primarily conducted at the Bank.
As a bank holding company, we generate most of our revenue from interest on loans and investments
and fee-based revenues. Our primary source of funding for our loans is deposits. Our largest expenses are
interest on these deposits and salaries and related employee benefits. We measure our performance
primarily through our net interest margin, efficiency ratio, ratio of allowance for loan losses to total loans,
return on average assets and return on average equity, among other metrics, while maintaining appropriate
regulatory leverage and risk-based capital ratios.
Executive Overview
We are focused on becoming the “Hometown” bank and the banking provider of choice in our highly
attractive market area, and to serve as a locally based alternative to our larger competitors. We aim to do
this through:
•
•
•
•
•
Responsive, customer-centric products and services and a community focus;
Strategic acquisitions;
Utilization of efficient and scalable infrastructure;
Disciplined focus on risk management; and
Organic growth.
On November 5, 2013 we completed the merger of Wilton Bank into Bankwell Bank.
On May 15, 2014, Bankwell Financial Group, Inc. priced 2,702,703 common shares in its IPO at
$18.00 per share, and on May 15, 2014, Bankwell common shares began trading on the Nasdaq Stock
Market. The net proceeds from the IPO were approximately $44.7 million, after deducting the underwriting
discount of approximately $2.5 million and approximately $1.3 million of expenses. We intend to use the
net proceeds for general corporate purposes, which may include maintaining liquidity at the holding
company, providing equity capital to the Bank to fund balance sheet growth, our working capital needs, and
funding acquisitions of branches, whole financial institutions and related lines of businesses in or around
our existing market that further our objectives.
41
On October 1, 2014 we completed the merger of Quinnipiac Bank and Trust Company into Bankwell
Bank. Quinnipiac had one branch located in Hamden, Connecticut and a second branch located in the
neighboring town of North Haven, Connecticut.
The primary measures we use to evaluate and manage our financial results are set forth in the table
below. Although we believe these measures are meaningful in evaluating our results and financial condition,
they may not be directly comparable to similar measures used by other financial services companies and
may not provide an appropriate basis to compare our results or financial condition to the results or
financial condition of our competitors. The following table sets forth the key financial measures we use to
evaluate the success of our business and our financial position and operating performance.
Selected balance sheet measures:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross portfolio loans(b)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected statement of income measures:
Total revenue(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income before provision for loan losses . . . . . . . . . . . . .
Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other financial measures and ratios:
Return on average assets(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average common shareholders’ equity . . . . . . . . . . . . . . .
Net interest margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Efficiency ratio(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible book value per share (end of period)(c)(e) . . . . . . . . . . . . . .
Net (recoveries) charge-off’s to average loans(b) . . . . . . . . . . . . . . . .
Nonperforming assets to total assets(f) . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses to nonperforming loans . . . . . . . . . . . . . .
Allowance for loan losses to total loans(b) . . . . . . . . . . . . . . . . . . . .
Key Financial Measures(a)
At or For the Years Ended December 31,
2014
2013
2012
(Dollars in thousands, except per share data)
$1,099,531
929,762
$779,618
632,012
$610,016
530,050
835,439
129,000
129,210
661,545
44,000
69,485
462,081
91,000
51,534
34,701
31,660
6,737
4,568
0.78
0.78
30,050
25,327
7,345
5,161
1.46
1.44
21,550
21,205
1,871
1,214
0.39
0.38
0.77%
9.68%
3.94%
75.71%
15.46
$
0.22%
2.73%
4.11%
82.76%
14.50
$
0.52%
5.13%
3.84%
69.09%
16.35
(0.05)%
0.39%
$
0.03%
0.23%
0.07%
0.81%
323.02% 835.69% 200.84%
1.50%
1.33%
1.17%
(a) We have derived the selected balance sheet measures as of December 31, 2014 and 2013 and the
selected statement of income measures for the years ended December 31, 2014, 2013 and 2012 from
our audited consolidated financial statements included elsewhere in this annual report. We have derived
the selected balance sheet measures as of December 31, 2012 from our audited consolidated statement
of financial condition not included in this annual report. Average balances have been computed using
daily averages. Our historical results may not be indicative of our results for any future period.
(b) Calculated using the principal amounts outstanding on loans.
(c) This measure is not a measure recognized under GAAP and is therefore considered to be a non-GAAP
financial measure. See “Non-GAAP Financial Measures” for a description of this measure and a
reconciliation of this measure to its most directly comparable GAAP measure.
42
(d) Calculated based on net income before preferred stock dividends.
(e) Excludes preferred stock and unvested restricted stock awards.
(f) Nonperforming assets consist of nonperforming loans and other real estate owned.
Quinnipiac Acquisition
On October 1, 2014, the Company acquired all of the outstanding common shares of Quinnipiac Bank
& Trust Company (“Quinnipiac”). Quinnipiac had one branch located in Hamden, Connecticut, and a
second branch in the neighboring town of North Haven. Both towns are in New Haven County,
Connecticut, which represented a new market for us.
Quinnipiac shareholders received 510,122 shares of the Company common stock and $3.6 million in
cash. As of September 30, 2014, Quinnipiac had assets with a carrying value of approximately $117.8
million, including loans outstanding with a carrying value of approximately $97.1 million, as well as
deposits with a carrying value of approximately $100.4 million and a book value of $10.1 million. The
results of Quinnipiac’s operations are included in the Company’s Consolidated Statement of Income from
the date of acquisition. The Company incurred $1.7 million of merger and acquisition expenses related to
the Quinnipiac merger for the year ended December 31, 2014. As a result of the merger the Company
recorded $2.6 million of goodwill.
The Wilton Bank Acquisition
On November 5, 2013, we acquired all of the outstanding common shares of The Wilton Bank. The
Wilton Bank was a state chartered commercial bank located in Wilton, Connecticut, which operated as one
branch. As a result of the transaction, The Wilton Bank merged into the Bank. This business combination
expanded our presence in Fairfield County and enhanced opportunities for businesses, customer
relationships, employees and the communities we serve.
On the acquisition date, The Wilton Bank had shareholders’ equity of $6.3 million, with a book value
per share of $17.00. As part of the acquisition, The Wilton Bank shareholders received $13.50 per share
resulting in an aggregate deal value of $5.0 million. In accordance with applicable accounting guidance, the
amount paid was allocated to the fair value of the net assets acquired, with any excess amounts recorded as
goodwill. If the fair value of the net assets is greater than the amount paid, the excess amount is recorded to
noninterest income as a gain on the purchase. We recorded a gain of $1.3 million in conjunction with the
acquisition, representing the amount that the net assets exceeded the amount paid. Fair values of certain
balance sheet items were cash of $35.9 million, loans of $25.1 million and deposits of $64.2 million. The
results of The Wilton Bank’s operations have been included in our Consolidated Statement of Income from
the acquisition date.
Critical Accounting Policies and Estimates
The discussion and analysis of our results of operations and financial condition are based on our
consolidated financial statements, which have been prepared in accordance with GAAP and with general
practices within the financial services industry. The preparation of financial statements in conformity with
GAAP requires us to make significant estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses. Actual results could differ from our current estimates, as a result of
changing conditions and future events. The current economic environment has increased the degree of
uncertainty inherent in these significant estimates.
We believe that accounting estimates for the fair value of acquired assets, the allowance for loan losses,
stock-based compensation and derivative instrument valuation are particularly critical and susceptible to
significant near-term change.
Fair Value of Acquired Assets
Loans that the Company acquired in acquisitions are initially recorded at fair value with no carryover
of the related allowance for credit losses. Determining the fair value of the loans involves estimating the
amount and timing of principal and interest cash flows initially expected to be collected on the loans and
discounting those cash flows at an appropriate market rate of interest.
43
For loans which meet the criteria stipulated in Accounting Standards Codification (“ASC”) 310-30,
“Loans and Debt Securities Acquired with Deteriorated Credit Quality”, the Company recognizes an
accretable yield, which is defined as the excess of all cash flows expected at acquisition over the initial fair
value of the loan, as interest income on a level-yield basis over the expected remaining life of the loan. The
excess of the loan’s contractually required payments over the cash flows expected to be collected is the
nonaccretable difference. The nonaccretable difference is not recognized as an adjustment of yield, a loss
accrual, or a valuation allowance. After the initial acquisition, the Company continues to evaluate whether
the timing and the amount of cash to be collected are reasonably estimated. Subsequent significant
increases in cash flows the Company expects to collect will first reduce previously recognized valuation
allowance and then be reflected prospectively as an increase to the level yield. Subsequent decreases in
expected cash flows may result in the loan being considered impaired. Interest income is not recognized to
the extent that the net investment in the loan would increase to an amount greater than the estimated payoff
amount.
For ASC 310-30 loans, the expected cash flows reflect anticipated prepayments, determined on a loan
by loan basis, according to the anticipated collection plan of these loans. Prepayments result in the
recognition of the nonaccretable balance as current period yield. Changes in prepayment assumptions may
change the amount of interest income and principal expected to be collected. The expected prepayments
used to determine the accretable yield are consistent between the cash flows expected to be collected and
projections of contractual cash flows so as to not affect the nonaccretable difference.
For loans that do not meet the ASC 310-30 criteria, the Company records interest income on a level
yield basis using the contractually required cash flows. The Company subjects loans that do not meet the
ASC 310-30 criteria to ASC Topic 450, “Contingencies”, by collectively evaluating these loans for an
allowance for loan loss, using the same methodology as loans originated by the Company.
Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition are considered
performing upon acquisition, regardless of whether the customer is contractually delinquent,
if the
Company can reasonably estimate the timing and amount of the expected cash flows on such loans and if
the Company expects to fully collect the new carrying value of the loans. As such, the Company may no
longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans,
including the impact of any accretable yield. The Company has determined that it can reasonably estimate
future cash flows on the Company’s current portfolio of acquired loans that are past due 90 days or more,
and on which the Company is accruing interest and the Company expects to fully collect the carrying value
of the loans.
In accordance with applicable accounting guidance, the amount paid for acquired assets is allocated to
the fair value of the net assets acquired, with any excess amounts recorded as goodwill. If the fair value of
the net assets is greater than the amount paid, the excess amount is recorded to noninterest income as a
gain on the purchase. Goodwill and identifiable intangible assets are evaluated for impairment annually or
whenever events or changes in circumstances indicate the carrying value of these assets may not be
recoverable. When these assets are evaluated for impairment, if the carrying amount exceeds fair value, an
impairment charge is recorded to income. The fair value is based on observable market prices, when
practicable. Other valuation techniques may be used when market prices are unavailable,
including
estimated discounted cash flows. This type of analysis contains uncertainties because it requires
management to make assumptions and to apply judgment to estimate industry economic factors and the
profitability of future business strategies. In the event of future changes in fair value, the Company may be
exposed to an impairment charge that could be material.
Allowance for Loan Losses
Determining an appropriate level of allowance for loan losses necessarily involves a high degree of
judgment. We use a methodology to systematically measure the amount of estimated loan loss exposure
inherent in the loan portfolio for purposes of establishing a sufficient allowance for loan losses. The
methodology includes three elements:
(1) Loss allocations are identified for individual loans deemed to be impaired in accordance with
GAAP. Impaired loans are loans for which it is probable that the Bank will not be able to collect all
amounts due according to the contractual terms of the loan agreements, including non-accrual loans
44
and all loans restructured in a troubled debt restructuring. Impaired loans do not include large groups
of smaller-balance homogeneous loans that are collectively evaluated for impairment, which consist of
most residential mortgage loans and consumer loans. Impairment is measured on a discounted cash
flow method based upon the loan’s contractual effective interest rate, or at the loan’s observable market
price, or if the loan is collateral dependent, at the fair value of the collateral less costs to sell. For
collateral dependent loans, management may adjust appraised values to reflect estimated market value
declines or apply other discounts to appraised values for unobservable factors resulting from its
knowledge of circumstances associated with the property.
loss
(2) Loss allocations for non-impaired loans are based on peer bank data, historical
experience, credit, grade, delinquency factors and other similar credit quality indicators, adjusted for
qualitative factors. Qualitative factors include, but are not limited to, the value of underlying collateral,
concentrations of credit, current economic conditions, the state of the business cycle and competitive
and regulatory issues.
Individual commercial loans and commercial mortgage loans not deemed to be impaired are
evaluated using an internal rating system and the application of loss allocation factors. The loan rating
system is described under the caption “Credit quality indicators” in Note 7 of
the Notes to
Consolidated Financial Statements. The loan rating system and the related loss allocation factors take
the borrower’s
into consideration parameters
performance with respect to loan terms, and the adequacy of collateral. The loss allocation factors also
take into account general and regional economic statistics, trends, and portfolio characteristics such as
age of portfolio and the Bank’s experience with a particular loan product. We periodically reassess and
revise the loss allocation factors used in the assignment of loss exposure to appropriately reflect our
analysis of migrational loss experience.
including the borrower’s
financial condition,
loans,
Portfolios of more homogeneous populations of
including the various categories of
residential mortgages and consumer loans are analyzed as groups taking into account delinquency
ratios and other indicators and our historical loss experience for each type of credit product. We
analyze historical loss experience over periods deemed to be relevant to the inherent risk of loss in loan
portfolios as of the balance sheet date. We periodically update these analyses and adjust the loss
allocations for various factors that we believe are not adequately presented in historical loss experience
including trends in real estate values, changes in unemployment levels and increases in delinquency
levels. These factors are also evaluated taking into account the geographic location of the underlying
loans.
(3) An unallocated allowance may or may not be required and is for measurement imprecision
attributable to uncertainty in the underlying assumptions used in the methodologies for estimating
specific and general losses in the portfolio.
Because the methodology is based upon peer bank data and trends, current economic data as well
as management’s judgment, factors may arise that result in different estimations. Adversely different
conditions or assumptions could lead to increases in the allowance. In addition, various regulatory
agencies periodically review the allowance for loans losses. Such agencies may require additions to the
allowance based on their judgments about information available to them at the time of
their
examination. As of December 31, 2014, management believes that the allowance is adequate and
consistent with asset quality and delinquency indicators.
Stock-based Compensation
Stock-based compensation expense is measured as of the grant date, based on the fair value of the
award, and is recognized as an expense over the requisite service period.
Derivative Instrument Valuation
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
45
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.
Emerging Growth Company
The JOBS Act permits us, as an “emerging growth company”, to take advantage of an extended
transition period to comply with new or revised accounting standards and not commence complying with
new or revised accounting standards until private companies must do so. Under the JOBS Act, we may
make an irrevocable election to “opt out” of that extended transition period and comply with new or
revised accounting standards when public companies that are not emerging growth companies must
commence complying with those standards. We have elected to “opt out” of the extended transition period.
Earnings Overview
2014 Earnings Overview
Our net income for the year ended December 31, 2014 was $4.6 million, a decrease of $0.6 million, or
11.49%, compared to the year ended December 31, 2013. Our returns on average equity and average assets
for the year ended December 31, 2014, were 4.66% and 0.52%, respectively, compared to 8.17% and 0.77%,
respectively for the year ended December 31, 2013. Net income available to common shareholders for the
year ended December 31, 2014, was $4.5 million, or $0.78 per diluted share, compared to net income
available to common shareholders of $5.1 million, or $1.44 per diluted share, for the year ended
December 31, 2013.
The decline in net income for 2014 compared to 2013 was primarily due to merger and acquisition
related expenses of $1.8 million primarily associated with the acquisition of Quinnipiac Bank and Trust
Company. Net interest income for the year ended December 31, 2014 was $31.7 million, an increase of $6.3
million compared to the year ended December 31, 2013 due to strong loan growth. Our net interest margin
decreased 10 basis points to 3.84% for the year ended December 31, 2014 compared to the year ended
December 31, 2013 reflecting the current interest rate environment in which market yields on new loan
growth have been below the average yield of the existing portfolio. The increase in noninterest expenses was
mainly due to higher salaries and employee benefits, reflecting staffing additions and higher incentive
accruals and merger and acquisition related expenses, attributable to the acquisition of Quinnipiac Bank
and Trust Company.
Our efficiency ratio was 69.09% for the year ended December 31, 2014 compared to 75.71% for the
year ended December 31, 2013. The improvement in our efficiency ratio was attributable to our focus on
expense control and achieving economies of scale.
2013 Earnings Overview
Our net income for the year ended December 31, 2013 was $5.2 million, an increase of $3.9 million, or
325%, compared to the year ended December 31, 2012. Our returns on average equity and average assets for
the year ended December 31, 2013, were 8.17% and 0.77%, respectively, compared to 2.40% and 0.22%,
respectively for the year ended December 31, 2012. Net income available to common shareholders for the
year ended December 31, 2013, was $5.1 million, or $1.44 per diluted share, compared to net income
available to common shareholders of $1.1 million, or $0.38 per diluted share, for the year ended
December 31, 2012.
46
Our strong improvement in net income for 2013 compared to 2012 was due primarily to strong
commercial loan growth, solid asset quality metrics, gains recorded on sales of investment securities and
efforts to diversify our revenue sources through sales of commercial loans for the first time during 2013. The
increase in net income reflects these factors through increases in net interest income and noninterest income
as well as a lower provision for loan losses, partially offset by higher noninterest expenses. While our net
interest income increased due to strong loan growth and a reduction in our cost of funds, our net interest
margin decreased 17 basis points to 3.94% for the year ended December 31, 2013 compared to the year
ended December 31, 2012 reflecting the current interest rate environment in which market yields on new
loan growth have been below the average yield of the existing portfolio. The increase in noninterest expenses
was mainly due to higher salaries and employee benefits, reflecting staffing additions and higher incentive
accruals, occupancy and equipment expense, attributable to costs related to branch relocations and
investments in technology and equipment as well as marketing expenses, including our rebranding efforts.
Additionally, in connection with our purchase of The Wilton Bank, we recorded a bargain purchase gain in
the amount of $1.3 million, which more than offset the merger and acquisition-related expenses of $908
thousand that we recognized in 2013.
Our efficiency ratio was 75.71% for the year ended December 31, 2013 compared to 82.76% for the
year ended December 31, 2012. The improvement in our efficiency ratio was attributable to our increased
operating leverage as we continued to grow our asset base and expand our noninterest income sources
despite increases in our noninterest expense. See “Non-GAAP Financial Measures” for a reconciliation of
efficiency ratio to comparable GAAP financial measures.
Results of Operations
Net Interest Income
Net interest income is the difference between interest earned on loans and securities and interest paid
on deposits and other borrowings, and is the primary source of our operating income. Net interest income
is affected by the level of interest rates, changes in interest rates and changes in the amount and
composition of interest-earning assets and interest-bearing liabilities. Included in interest income are certain
loan fees, such as deferred origination fees and late charges. The following tables and discussion present net
interest income on a fully taxable equivalent, or FTE basis, by adjusting income and yields on tax-exempt
loans and securities to be comparable to taxable loans and securities. We convert tax-exempt income to a
FTE basis using the statutory federal income tax rate adjusted for applicable state income taxes net of the
related federal tax benefit. The average balances are principally daily averages. Interest income on loans
includes the effect of deferred loan fees and costs accounted for as yield adjustments. Premium
amortization and discount accretion are included in the respective interest income and interest expense
amounts.
Year ended December 31, 2014 compared to year ended December 31, 2013
FTE net interest income for the years ended December 31, 2014 and 2013 was $32.1 million and $25.7
million, respectively. Net interest income increased due to increases in earning assets offset by our net
interest margin declining 10 basis points to 3.84% for the year ended December 31, 2014, compared to the
year ended December 31, 2013 due primarily to the effects of the low interest rate environment. While we
have experienced significant growth in average earning assets, in the current low interest rate environment,
market yields are below the average yield of our existing assets. Due to the combined effect of new loan
growth and the runoff of higher yielding loan balances, we anticipate that interest rates on total earning
assets will continue to decline. The impact of this trend is likely to exceed the benefit to be realized in
reduced funding costs, resulting in modestly lower net interest margin results in the near term.
FTE basis interest income for the year ended December 31, 2014 increased by $7.6 million to $36.0
million, or 27%, compared to FTE basis interest income for the year ended December 31, 2013 due
primarily to loan growth in our commercial real estate and commercial business portfolios partially offset by
lower yields. Average interest-earning assets were $835.4 million for the year ended December 31, 2014, up
by $183.7 million from the year ended December 31, 2013. The average balance of total loans increased
$149.2 million, or 26%, contributing $6.8 million to the increase in interest income. Commercial real estate
47
loan average balances grew by $79.2 million due to strong origination activity reflecting our ability to source
quality opportunities and continued economic improvement in our market. Total average balance of
securities for the year ended December 31, 2014 increased by $20.5 million, or 50%, from the year ended
December 31, 2013, reflecting purchases outpacing maturities.
Interest expense for the year ended December 31, 2014, increased by $1.2 million, or 42%, compared to
interest expense for 2013 due to an increase in time deposits and higher funding costs. The weighted average
cost of deposits increased 15 basis points to 0.58% due to a slight increase in rates and shifting of deposits
to higher costing time deposits. The weighted average cost of borrowed money increased by 23 basis points
to 0.96%, due to interest expense on FHLB borrowings we swapped for a higher fixed rate to hedge against
rising interest rates. Average funding liabilities for the year ended December 31, 2014, increased by $169.0
million, or 28%, from the year ended December 31, 2013, primarily due to higher average balances of $79.7
million in time deposits, $66.4 million in money market accounts and $40.7 million in noninterest-bearing
deposits.
Year ended December 31, 2013 compared to year ended December 31, 2012
FTE net interest income for the years ended December 31, 2013 and 2012 was $25.7 million and $21.6
million, respectively. Net interest income increased due to increases in earning assets offset by our net
interest margin declining 17 basis points to 3.94% for the year ended December 31, 2013, compared to the
year ended December 31, 2012 due primarily to the effects of the low interest rate environment. While we
have experienced significant growth in average loan balances, in the current low interest rate environment,
market yields on new loan originations are below the average yield of our existing loan portfolio.
FTE basis interest income for the year ended December 31, 2013 increased by $3.7 million to $28.5
million, or 15%, compared to FTE basis interest income for the year ended December 31, 2012 due
primarily to loan growth in our commercial real estate and commercial business portfolios. Average
interest-earning assets were $651.7 million for the year ended December 31, 2013, up by $126.7 million from
the year ended December 31, 2012. The average balance of total loans increased $122.4 million, or 27%,
contributing $4.3 million to the increase in interest income. Commercial real estate loan average balances
grew by $62.2 million due to strong origination activity reflecting our ability to source quality opportunities
and continued economic improvement in our market. Partially offsetting the increase in interest income due
to volume was a 33 basis point decrease in the weighted average yield earned on our loan portfolio due to a
lower interest rate environment, which caused a reduction of $1.6 million in interest income. Total average
balance of securities for the year ended December 31, 2013 decreased by $15.4 million, or 27%, from the
same period in 2012, reflecting maturities, principal paydowns and sales of $9.4 million of longer-term U.S.
Government and agency obligations, partially offset by our purchase of municipal bonds.
Interest expense for the year ended December 31, 2013, was reduced by $427 thousand, or 13%,
compared to interest expense for 2012 due to a continued reduction in our funding costs resulting from the
sustained low interest rate environment. The weighted average cost of deposits declined 13 basis points to
0.43% due to our measured approach of reducing deposit rates while still experiencing significant deposit
growth. The weighted average cost of Federal Home Loan Bank of Boston, or FHLBB, advances declined
by 60 basis points to 0.73%, also reflecting the low interest rate environment as higher cost advances
matured or were paid off and new advances were utilized. Average funding liabilities for the year ended
December 31, 2013, increased by $112.1 million, or 23%, from the year ended December 31, 2012, primarily
due to higher average balances of $36.6 million in time deposits, $26.0 million in money market accounts
and $17.6 million in noninterest-bearing deposits.
Average balance sheet, FTE basis interest income, interest expense, average yields earned and rates paid
The following table presents average balance sheet information, FTE basis interest income, interest
expense and the corresponding average yields earned and rates paid for the years ended December 31, 2014,
2013 and 2012. Tax-exempt income is converted to a FTE basis using the statutory federal income tax rate
adjusted for applicable state income taxes net of the related federal tax benefit. The average balances are
principally daily averages. Interest income on loans includes the effect of deferred loan fees and costs
accounted for as yield adjustments. Premium amortization and discount accretion are included in the
respective interest income and interest expense amounts.
48
Years Ended December 31,
2014
2013
2012
Average
Balance
Interest
Yield /
Rate
Average
Balance
Interest
Yield /
Rate
Average
Balance
Interest
Yield /
Rate
(Dollars in thousands)
Assets:
Cash and Fed funds sold . . . . . . . . . . $ 49,152 $
Securities(1)
. . . . . . . . . . . . . . . . . .
61,398
127
0.26% $ 35,599 $
84
0.24% $ 16,933 $
35
0.21%
2,424
3.95
40,932
1,766
4.31
56,321
2,366
4.20
Loans:
Commercial real estate . . . . . . . . . .
378,345
18,515
Residential real estate
Construction(2)
. . . . . . . . . .
164,598
. . . . . . . . . . . . . .
49,212
Commercial business . . . . . . . . . . .
109,121
Home equity . . . . . . . . . . . . . . . .
14,529
Consumer . . . . . . . . . . . . . . . . .
1,270
5,911
2,300
5,496
564
81
4.83
3.59
4.61
4.97
3.88
6.35
Acquired Loan Portfolio Non accrual
loans (net of mark) . . . . . . . . . .
2,707
545 20.14
299,142
15,124
5.06
236,934
12,919
152,498
5,577
3.66
119,960
38,073
1,763
4.63
69,252
3,699
5.34
11,287
423
3.74
308
—
18
5.98
— —
34,177
44,220
12,789
80
—
4,826
1,752
2,370
465
—
5.45
4.02
5.13
5.36
3.64
—
4.99
0.49
10 12.50
Total loans . . . . . . . . . . . . . . .
719,782
33,412
Federal Home Loan Bank stock . . . . . .
5,078
73
4.59
1.45
570,560
26,604
4.66
448,160
22,342
4,624
17
0.36
3,615
18
Total earning assets . . . . . . . . . . . .
835,410 $36,036
4.25% 651,715 $28,471
4.37% 525,029 $24,761
4.72%
Other assets . . . . . . . . . . . . . . . . . .
43,535
Total assets
. . . . . . . . . . . . . . . . $878,945
17,782
$669,497
16,297
$541,326
Liabilities and shareholders’ equity:
Interest-bearing liabilities:
NOW . . . . . . . . . . . . . . . . . . . . $ 53,041
58
0.11% $ 40,554
49
0.12% $ 31,490
45
0.14%
Money market
. . . . . . . . . . . . . .
182,676
Savings . . . . . . . . . . . . . . . . . . .
91,058
Time . . . . . . . . . . . . . . . . . . . .
238,710
Total interest-bearing deposits . . . .
565,485
Borrowed Money . . . . . . . . . . . . . .
65,953
836
302
2,099
3,295
634
0.46
0.33
0.88
0.58
0.96
116,323
117,388
498
543
0.45
0.46
90,342
102,641
158,996
1,143
0.72
122,350
612
846
864
433,261
2,233
0.43
346,823
2,367
69,912
532
0.73
61,836
825
0.68
0.82
0.71
0.56
1.33
Total interest bearing liabilities . . . . .
631,438 $ 3,929
0.62% 503,173 $ 2,765
0.47% 408,659 $ 3,192
0.66%
Noninterest-bearing deposits . . . . . . . .
136,748
Other liabilities . . . . . . . . . . . . . . . .
12,838
Total Liabilities . . . . . . . . . . . . . . . .
781,024
Shareholders’ equity . . . . . . . . . . . . .
97,921
Total liabilities and shareholders’
equity . . . . . . . . . . . . . . . . . . $878,945
96,009
7,173
606,355
63,142
78,453
3,642
490,754
50,572
$669,497
$541,326
Net interest income(3)
. . . . . . . . . .
$32,107
$25,706
$21,569
Interest rate spread . . . . . . . . . . . . .
Net interest margin(4)
. . . . . . . . . . . .
3.63%
3.84%
3.90%
3.94%
4.06%
4.11%
(1) Average balances and yields for securities are based on amortized cost.
(2)
Includes commercial and residential real estate construction loans.
(3) The adjustment for securities and loans taxable equivalency was $447 thousand, $379 thousand and
$364 thousand, respectively, for the years ended December 31, 2014, 2013 and 2012.
(4) Net interest income as a percentage of total earning assets.
49
Effect of changes in interest rates and volume of average earning assets and average interest-bearing liabilities
The following table shows the extent to which changes in interest rates and changes in the volume of
average earning assets and average interest-bearing liabilities have affected net interest income. For each
category of earning assets and interest-bearing liabilities, information is provided relating to: changes in
volume (changes in average balances multiplied by the prior year’s average interest rates); changes in rates
(changes in average interest rates multiplied by the prior year’s average balances); and the total change.
Changes attributable to both volume and rate have been allocated proportionately based on the relationship
of the absolute dollar amount of change in each.
Year Ended
December 31, 2014 vs 2013
Increase (Decrease)
Year Ended
December 31, 2013 vs 2012
Increase (Decrease)
Volume
Rate
Total
Volume
Rate
Total
(In thousands)
Interest and dividend income:
Cash and Fed funds sold . . . . . . . . . . . . . . . .
$
35
$
9
$
44
$
44
$
Securities
. . . . . . . . . . . . . . . . . . . . . . . . . .
818
(161)
657
(662)
Loans:
Commercial real estate . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . .
Acquired Non accrual loans (net of mark) . .
Total loans . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock . . . . . . . . . .
Total change in interest and dividend
3,904
436
520
2,026
125
61
545
7,617
2
(513)
(102)
17
(229)
16
1
—
(810)
55
3,391
334
537
1,797
141
62
545
6,807
57
3,198
1,220
189
1,337
(56)
16
—
5,904
4
5
62
$
49
(600)
(993)
(469)
(178)
(8)
14
(8)
—
(1,642)
(5)
2,205
751
11
1,329
(42)
8
—
4,262
(1)
income . . . . . . . . . . . . . . . . . . . . . . . . .
8,472
(907)
7,565
5,290
(1,580)
3,710
Interest expense:
Deposits:
NOW . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market . . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . .
Time . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . .
Borrowed Money . . . . . . . . . . . . . . . . . . . . .
Total change in interest expense . . . . . . . . .
14
303
(106)
662
873
(30)
843
(5)
35
(135)
294
189
132
321
9
338
(241)
956
1,062
102
1,164
12
148
108
263
531
97
628
(8)
(262)
(411)
16
(665)
(390)
(1,055)
4
(114)
(303)
279
(134)
(293)
(427)
Change in net interest income . . . . . . . . . . . . . .
$7,629
$(1,228) $6,401
$4,662
$ (525) $4,137
Provision for Loan Losses
The provision for loan losses is based on management’s periodic assessment of the adequacy of our
allowance for loan losses which, in turn, is based on such interrelated factors as the composition of our loan
portfolio and its inherent risk characteristics, the level of nonperforming loans and net charge-offs, both
current and historic, local economic and credit conditions, the direction of real estate values, and regulatory
guidelines. The provision for loan losses is charged against earnings in order to maintain our allowance for
loan losses and reflects management’s best estimate of probable losses inherent in our loan portfolio at the
balance sheet date.
50
Under accounting standards for business combinations, acquired loans are recorded at fair value with
no loan loss allowance on the date of acquisition. A provision for loan losses will be recorded for the
emergence of new probable and estimable losses on acquired loans which were not impaired as of the
acquisition date. As of and for the year ended December 31, 2014, there was no provision or allowance for
loan losses related to the loan portfolio that we acquired.
The provision for loan losses for the year ended December 31, 2014 was $2.2 million compared to a
$585 thousand provision for loan losses for the year ended December 31, 2013. The higher 2014 provision
for loan losses is attributable to significant growth in our loan portfolio. The 2013 provision for loan losses
reflected a low level of net charge-offs, nonperforming and past due loans and an overall improvement in
our credit quality compared to 2012. The provision charged to earnings in 2012 was $1.8 million.
Noninterest Income
Noninterest income is a component of our revenue and is comprised primarily of fees generated from
loan and deposit relationships with our customers, fees generated from sales and referrals of loans and
gains on sales of our investment securities. The following table compares noninterest income for the years
ended December 31, 2014, 2013 and 2012.
Gains and fees from sales of loans . . . . . .
Service charges and fees . . . . . . . . . . . . .
Bank owned life insurance . . . . . . . . . . .
Net gain on sale of available for sale
Years Ended
December 31,
2014/2013
Change
2013/2012
Change
2014
2013
2012
$
%
$
%
(Dollars in thousands)
$1,313
643
497
$2,020
416
31
$ 18
314
—
$ (707)
227
466
(35)% $2,002
102
55
31
1,503
11,122%
32
100
securities . . . . . . . . . . . . . . . . . . . . . .
—
648
(18)
(648)
(100)
666
3,700
Gain (loss) on sale of foreclosed real
estate, net
. . . . . . . . . . . . . . . . . . . . .
Gain on bargain purchase . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . .
64
—
— 1,333
211
588
(64)
—
— (1,333)
377
31
(100)
(100)
179
64
1,333
180
100
100
581
Total noninterest income . . . . . . . . . . .
$3,041
$4,723
$345
$(1,682)
(36)% $4,378
1,269%
Year ended December 31, 2014 compared to year ended December 31, 2013
Noninterest income totaled $3.0 million for the year ended December 31, 2014, compared to $4.7
million for the year ended December 31, 2013. This decrease was primarily due to the gain on bargain
purchase from the Wilton Bank acquisition and the net gain on sale of available for sale securities
recognized in 2013.
Gains and fees from sales and referrals of loans. Loan sales are dependent on origination volume and
are sensitive to interest rates, housing and market conditions. During the year ended December 31, 2014,
the Company recorded $61 thousand in gains on the sale of $4.5 million of residential real estate loans,
$413 thousand of gains on the sale of $14.9 million of commercial real estate loans and $839 thousand of
gains on sales of $7.4 million of SBA loans. For the year ended December 31, 2014, gains and fees from
sales of loans totaled $1.3 million, a decrease of $0.7 million compared to the year ended December 31,
2013 due to a decline in the volume of loan sales.
Service charges and fees. We earn fees from our customers for deposit-related services. For the year
ended December 31, 2014, service charges and fees totaled $643 thousand. The increase of $227 thousand,
or 55%, over the year ended December 31, 2013 was primarily due to increases in ATM and debit card fees
and non-sufficient fund charges, as well as higher volume levels.
Bank Owned Life Insurance.
In the fourth quarter of 2013 the Company purchased $10.0 million in
bank-owned life insurance coverage and in the third quarter of 2014 the Company purchased an additional
$12.5 million in bank-owned life insurance coverage and the cash surrender value increased by $466
51
thousand for the year ended December 31, 2014 compared to the year ended December 31, 2013. Prior to
the fourth quarter of 2013, the Company did not own bank owned life insurance.
Other. We recorded other income of $588 thousand during the year ended December 31, 2014, an
increase of $377 thousand compared to the year ended December 31, 2013. The increase is primarily due to
increases in investment services income, servicing fees and rental income.
Year ended December 31, 2013 compared to year ended December 31, 2012
Noninterest income totaled $4.7 million for the year ended December 31, 2013, compared to $345
thousand for the year ended December 31, 2012. This increase was primarily due to gains we recorded on
sales of commercial loans and available for sale securities as well as a one-time bargain purchase gain of
$1.3 million recorded in connection with our acquisition of the Wilton Bank.
Service charges and fees. We earn fees from our customers for deposit-related services. For the year
ended December 31, 2013, service charges and fees totaled $416 thousand. The increase of $102 thousand,
or 32%, over the year ended December 31, 2012 was primarily due to increases in ATM and debit card fees
and non-sufficient fund charges caused by an increase in our pricing schedule at the beginning of 2013 and,
to a lesser extent, higher volume levels.
Gains and fees from sales and referrals of loans. Loan sales are dependent on origination volume and
are sensitive to interest rates, housing and market conditions. During the year ended December 31, 2013, we
recorded income of $1.8 million on the sale of $65.0 million of commercial mortgage loans, $93 thousand
on the sale of $1.0 million of small business administration commercial loans and $84 thousand on sales of
residential mortgage loans. We sold the loans described above in response to favorable market conditions as
well as our desire to reduce our ratio of commercial mortgage loans to total risk-based capital. As part of
the commercial mortgage loan sales, we incurred fees to a third party of $258 thousand, which were
recorded under professional fees in noninterest expense.
Gain on bargain purchase. We recorded a gain of $1.3 million in conjunction with our acquisition of
the Wilton Bank. In accordance with applicable accounting guidance, the amount paid is allocated to the
fair value of the net assets acquired, with any excess amounts recorded as goodwill. If the fair value of the
net assets is greater than the amount paid, the excess amount is recorded to noninterest income as a gain on
the purchase.
Net gain (loss) on sale of available for sale securities. We sell available-for-sale investment securities
from time to time for various business purposes, including funding loan demand and managing asset /
liability sensitivity. Net gains on the sale of available-for-sale securities totaled $648 thousand for the year
ended December 31, 2013 compared to a net loss of $18 thousand for the same period in 2012 due to
market conditions at the time as well as the type of securities sold. Investment grade securities were sold in
the first half of the year to shorten the duration of the portfolio and to capitalize on favorable market
conditions.
Gain on sale of foreclosed real estate. During 2012, we took possession of two properties that we later
sold in 2013. In addition, in 2013 we sold a foreclosed property that we attained in our acquisition of the
Wilton Bank. Net gains on the sale of foreclosed real estate of $64 thousand were recorded in 2013,
reflecting these sales.
Other. We recorded other income of $211 thousand during the year ended December 31, 2013,
primarily reflecting the partial recovery of a wire fraud loss, which occurred in 2012. The increase in other
income also reflected rental income of $18 thousand. Included in the acquisition of the Wilton Bank was
the building, of which a portion is rented.
52
Noninterest Expense
The following table compares noninterest expense for the years ended December 31, 2014, 2013 and
2012.
Years Ended
December 31,
2014/2013
Change
2013/2012
Change
2014
2013
2012
$
%
$
%
(Dollars in thousands)
Salaries and employee benefits . . . . . . . . . .
$13,534
$11,578
$ 9,451
$1,956
17% $2,127
23%
Occupancy and equipment . . . . . . . . . . . .
Merger and acquisition related expenses . . .
Data processing . . . . . . . . . . . . . . . . . . . .
Professional services . . . . . . . . . . . . . . . . .
Marketing . . . . . . . . . . . . . . . . . . . . . . . .
Director fees . . . . . . . . . . . . . . . . . . . . . .
FDIC insurance . . . . . . . . . . . . . . . . . . . .
Amortization of intangibles . . . . . . . . . . .
Foreclosed real estate . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,422
1,801
1,289
1,194
674
650
488
133
36
1,591
3,420
908
1,349
1,595
927
330
333
18
8
1,654
3,004
1,002
—
1,209
1,546
333
381
365
—
9
1,560
893
(60)
(401)
(253)
320
155
115
28
(63)
29
98
(4)
(25)
(27)
97
47
639
350
(4)
416
908
140
49
14
100
12
3
594
178
(51)
(32)
18
(1)
94
(13)
(9)
100
(11)
6
Total noninterest expense . . . . . . . . . . .
$25,812
$22,120
$17,858
$3,692
17% $4,262
24%
Year ended December 31, 2014 compared to year ended December 31, 2013
Noninterest expense was $25.8 million for the year ended December 31, 2014, compared to $22.1
million for the year ended December 31, 2013. The increase of $3.7 million, or 17%, largely reflects higher
salaries and employee benefits, reflecting staffing additions and higher incentive accruals and higher merger
and acquisition related expenses, attributable to the acquisition of Quinnipiac Bank and Trust Company.
Salaries and employee benefits. Salaries and employee benefit costs are the largest component of
noninterest expense and include employee payroll expense, equity and non-equity incentive compensation,
health insurance, benefit plans and payroll taxes. Salaries and employee benefits increased by $2.0 million,
or 17%, for the year ended December 31, 2014 compared to the year ended December 31, 2013, largely
reflecting higher staffing levels and incentive accruals. Staffing increased to 123 full time employees at
December 31, 2014 from 106 full time employees at December 31, 2013.
Occupancy and equipment. Rent, depreciation and maintenance costs comprise the majority of
occupancy and equipment expenses, which increased by $1.0 million, or 29%, for the year ended
December 31, 2014, compared to the year ended December 31, 2013. The increase primarily related to costs
associated with the two branches added as a result of the Quinnipiac Bank acquisition and investments
related to technology and other equipment.
Professional services. Professional services include legal, audit and professional fees paid to external
parties. For the year ended December 31, 2014 professional services decreased by $401 thousand, or 25%,
compared to the year ended December 31, 2013. The decrease in the 2014 expense is primarily driven by a
reduction in fees paid to consultants.
Marketing. Marketing expenses for the years ended December 31, 2014 and 2013 totaled $674
thousand and $927 thousand, respectively. The decrease of $253 thousand, or 27%, reflects costs associated
with consolidating and rebranding the Bank of New Canaan and the Bank of Fairfield under a single entity
with the Bankwell name and BNC Financial Group was also rebranded as Bankwell Financial Group in
2013.
Director fees. Director fees totaled $650 thousand for the year ended December 31, 2014 and $330
thousand for the year ended December 31, 2013, representing fees paid to Board members to attend
meetings. The increase in Director fees is a result of an increase in the number of meetings and increased
number of directors.
53
FDIC insurance. We are subject to risked-based assessment fees by the FDIC for deposit insurance.
For the years ended December 31, 2014 and 2013, FDIC insurance expense was $488 thousand and $333
thousand, respectively. The increase in FDIC insurance expense is driven by increased assessments as a
result of increases in our asset base and deposits largely driven by mergers and acquisitions.
Amortization of intangibles. Amortization of intangibles for the years ended December 31, 2014 and
2013 totaled $133 thousand and $18 thousand, respectively. The increase in amortization of intangibles
largely reflects amortization of
the Wilton and
Quinnipiac acquisitions.
the core deposit intangible recorded as a result of
Merger and acquisition related expenses. Merger and acquisition related expenses primarily relate to
legal, consulting, system conversion, severance and marketing expenses incurred as a result of our
Quinnipiac acquisition. For the year ended December 31, 2014, these expenses totaled $1.8 million. The
increase in merger and acquisition expenses is driven by costs associated with the acquisition of Quinnipiac
Bank being higher than such costs incurred in 2013 related to the Wilton acquisition.
Year ended December 31, 2013 compared to year ended December 31, 2012
Noninterest expense was $22.1 million for the year ended December 31, 2013, compared to $17.9
million for the year ended December 31, 2012. The increase of $4.3 million, or 24%, largely reflects our
ongoing strategic initiative efforts that began in 2012. These efforts have included hiring of some of our
senior management team, evaluating and investing in core systems, maximizing core competencies, assessing
loan and fee income diversification avenues and exploring alternative investment strategies to prepare for
future growth. Additionally, we recorded one-time expenses of $908 thousand related to the Wilton Bank
acquisition.
Salaries and employee benefits. Salaries and employee benefit costs are the largest component of
noninterest expense and include employee payroll expense, equity and non-equity incentive compensation,
health insurance, benefit plans and payroll taxes. Salaries and employee benefits increased by $2.1 million,
or 23%, for the year ended December 31, 2013 compared to the same period in 2012, largely reflecting
higher staffing levels and incentive accruals. Staffing increased to 106 full-time employees at December 31,
2013 from 85 at December 31, 2012, which included a new Chief Operating Officer position in April 2013
and the opening of a loan production office in July 2012. Additionally, the costs of employee benefits have
risen significantly including a $243 thousand, or 73%, increase in medical and dental expenses.
Occupancy and equipment. Rent, depreciation and maintenance costs comprise the majority of
occupancy and equipment expenses, which increased by $416 thousand, or 14%,
in the year ended
December 31, 2013, compared to the year ended December 31, 2012. The increase primarily related to costs
associated with the relocation of two branch locations, which included approximately $300 thousand of
fixed asset write-offs, a loan production office opened in July 2012, expansion of the corporate premises
and investments related to technology and other equipment.
Data processing. Data processing expense for our core systems totaled $1.3 million for the year ended
December 31, 2013, compared to $1.2 million for the year ended December 31, 2012.
Marketing. Marketing expenses for the years ended December 31, 2013 and 2012 totaled $927
thousand and $333 thousand, respectively. In addition to supporting loan and deposit growth, the increase
of $594 thousand, or 178%, also reflects costs associated with consolidating and rebranding the Bank of
New Canaan and the Bank of Fairfield under a single entity with the Bankwell Bank name. BNC Financial
Group was also rebranded as Bankwell Financial Group. These changes became effective in
September 2013.
Merger and acquisition related expenses. Merger and acquisition related expenses primarily relate to
legal, consulting, system conversion, severance and marketing expenses incurred as a result of our the
Wilton Bank acquisition. For the year ended December 31, 2013, these expenses totaled $908 thousand.
Income Taxes
Income tax expense for the years ended December 31, 2014, 2013 and 2012 totaled $2.2 million, $2.2
million and $657 thousand, respectively. The effective tax rates for the years ended December 31, 2014, 2013
and 2012, were 32.2%, 29.7% and 35.1%, respectively. The increase in the effective tax rate for the year
54
ended December 31, 2014 is due to the gain on bargain purchase recognized in 2013. The decrease in the
effective tax rate for the year ended December 31, 2013 reflects increases in nontaxable income, mainly the
gain realized on the Wilton Bank acquisition.
Our net deferred tax asset at December 31, 2014, was $7.2 million, compared to $5.8 million, at
December 31, 2013. The increase in the deferred tax asset at December 31, 2014 is primarily related to
increases in deferred tax assets associated with the allowance for loan losses and deferred expenses. At
December 31, 2014 and 2013, a valuation allowance against the deferred tax benefits of the state operating
loss carry forwards and other state deferred tax assets totaled $806 thousand and $682 thousand,
respectively, reflecting that it is more likely than not that some of these deferred tax assets will not be
realized. At December 31, 2014, there were net operating loss carry forwards of approximately $9.3 million
for state tax purposes that were available to reduce future state taxable income. See Note 12 to our
Consolidated Financial Statements for further information regarding income taxes.
Financial Condition
Summary
Total assets at December 31, 2014 were $1.1 billion, an increase of $319.9 million, or 41%, from the
December 31, 2013 balance of $779.6 million. This increase was primarily due to strong loan growth driven
by the acquisition of Quinnipiac Bank and Trust Company and organic growth. Loans were $916.0 million
at December 31, 2014, up by $294.2 million from December 31, 2013. Cash balances decreased by $33.5
million during 2014, reflecting deployment of capital raised in the IPO and purchases of investment
securities. Also in the third quarter of 2014, we purchased $12.5 million of bank-owned life insurance to
diversify our revenue sources and yield tax-free earnings.
Total liabilities at December 31, 2014 were $970.3 million, an increase of $260.2 million from the
December 31, 2013 balance of $710.1 million. This increase was primarily due to an increase in deposits
and FHLB advances. Shareholders’ equity totaled $129.2 million at December 31, 2014, an increase of
$59.7 million, or 86%, from December 31, 2013, largely due to capital raised through the IPO and stock
issued as a result of the Quinnipiac Bank acquisition. The Bank exceeded the regulatory minimum capital
levels to be considered well-capitalized with total risk-based capital of 13.55% at December 31, 2014.
The Bank also had Tier 1 risk-based capital of 12.47% and Tier 1 capital to average assets ratio of
11.12% at December 31, 2014.
Loan Portfolio
The following table compares the composition of our loan portfolio for the dates indicated:
2014
2013
Change
Total
%
Total
%
(In thousands)
Real estate loans:
Residential
. . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . .
$175,031
521,181
63,229
18,166
777,607
149,259
2,896
18.83% $155,874
316,533
56.06
51,545
6.80
13,892
1.95
24.66% $ 19,157
204,648
50.08
11,684
8.16
4,274
2.20
83.64
16.05
0.31
537,844
93,566
602
85.10
14.80
0.10
239,763
55,693
2,294
Total loans . . . . . . . . . . . . . . . . . . . .
$929,762
100.00% $632,012
100.00% $297,750
Primary loan categories
Residential real estate. Residential real estate loans increased by $19.2 million, or 12% at
December 31, 2014 compared to December 31, 2013 and amounted to $175.0 million, representing 19% of
55
total loans at December 31, 2014. We originate residential real estate mortgages for our loan portfolio and
for sale in the secondary market. Loans may be sold with servicing retained or released. The mix and
volume of residential mortgage loan originations vary in response to changes in market interest rates and
customer preferences. During the years ended December 31, 2014 and 2013, the majority of our mortgage
originations were comprised of adjustable-rate loans for our loan portfolio. The improving economy,
sustained low interest rate environment and increased marketing efforts are all key factors in our ongoing
strategy to grow our portfolio of residential real estate loans.
Interest only adjustable-rate mortgage loans comprise 38% of residential real estate loans and 7% of
total loans. These loans are underwritten to the same standards as amortizing residential mortgage loans
and generally have the same risk profile. We do not believe that these loans present any special risk due, in
part, to borrower demographic (geographic location and per capita income), the high percentage of current
appraisal values and our performance of stress testing prior to converting to an amortizing loan.
Commercial real estate. Commercial real estate loans were $521.2 million and represented 56% of our
total loan portfolio, at December 31, 2014, a net increase of $204.6 million, or 65%, from December 31,
2013. Partially offsetting strong origination activity was the sale of $14.9 million of commercial real estate
loans during 2014. We executed these sales to reduce our ratio of commercial real estate loans to total
risk-based capital and to take advantage of favorable market conditions. Commercial real estate loan
growth during these periods largely reflects experienced lenders in the marketplace and the ability to source
quality opportunities, enhanced lending to existing customers and continued economic improvement in our
market. Commercial real estate loans are secured by a variety of property types, including office buildings,
retail facilities, commercial mixed use and multi-family dwellings.
Commercial business. Commercial business loans were $149.3 million and represented 16% of our
total loan portfolio at December 31, 2014, compared to $93.6 million and 15%, of the total portfolio at
December 31, 2013. Growth in our commercial business loans has been significant, largely reflecting our
including small business lending. Commercial business loans primarily
commitment to this segment,
provide working capital, equipment financing, financing for leasehold improvements and financing for
expansion and are generally secured by assignments of corporate assets, real estate and personal guarantees
of the business owners.
Construction. Construction loans were $63.2 million at December 31 2014, up by $11.7 million from
December 31, 2013, with $48.9 million attributable to commercial construction and $14.3 million
attributable to residential construction. Construction loans totaled $51.5 million at December 31, 2013, of
which $33.6 million were commercial construction and $17.9 million were residential construction.
Commercial construction loans consist of commercial development projects, such as condominiums,
apartment building and single-family subdivisions as well as office buildings, retail and other income
producing properties and land loans, while residential construction loans are to individuals to finance the
construction of residential dwellings for personal use.
Home equity. Home equity loans increased by $4.3 million, or 31%, during the year ended
December 31, 2014 and totaled $18.2 million at December 31, 2014. The increase from the December 31,
2013 balance of $13.9 million primarily reflecting loans acquired from the Quinnipiac Bank and Trust
Company. Total home equity loans consist of home equity lines of credit, which are secured by
owner-occupied one- to four-family residential properties.
Consumer. Consumer loans totaled $2.9 million at December 31, 2014 compared to $602 thousand at
December 31, 2013, reflecting loans acquired from the Quinnipiac Bank and Trust Company. Consumer
loans are secured by passbook or certificate accounts, or automobiles, as well as unsecured personal loans
and overdraft lines of credit.
We evaluate the appropriateness of our underwriting standards in response to changes in national and
regional economic conditions, including such matters as market interest rates, energy prices, trends in real
estate values, and employment levels. Based on our assessment of these matters, underwriting standards and
credit monitoring activities are enhanced from time to time in response to changes in these conditions.
56
The following table presents an analysis of the maturity of our commercial real estate, construction
and commercial business loan portfolios as of December 31, 2014.
December 31, 2014
Commercial
Real Estate
Commercial
Construction
Commercial
Business
Total
(In thousands)
Amounts due:
One Year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 15,694
$13,322
$ 25,918
$ 54,934
After one year:
One to five years . . . . . . . . . . . . . . . . . . . . . . . .
Over five years . . . . . . . . . . . . . . . . . . . . . . . . .
Total due after one year . . . . . . . . . . . . . . . . . . .
100,506
404,981
505,487
13,224
22,335
35,559
58,834
64,507
123,341
172,564
491,823
664,387
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$521,181
$48,881
$149,259
$719,321
The following table presents an analysis of the interest rate sensitivity of our commercial real estate,
construction and commercial business loan portfolios due after one year of December 31, 2014.
December 31, 2014
Adjustable
Interest Rate
Fixed Interest
Rate
Total
(In thousands)
Commercial Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Business
$209,905
3,359
45,484
$295,582
32,200
77,857
$505,487
35,559
123,341
Total loans due after one year . . . . . . . . . . . . . . . . . . . . . . . . . .
$258,748
$405,639
$664,387
Asset Quality
We actively manage asset quality through our underwriting practices and collection operations. Our
board of directors monitors credit risk management through two committees, the loan committee and the
audit committee. The loan committee has primary oversight responsibility for the credit granting function
including approval authority for credit granting policies, review of management’s credit granting activities
and approval of large exposure credit requests. The audit committee oversees management’s systems and
procedures to monitor the credit quality of our loan portfolio, conduct a loan review program, maintain the
integrity of the loan rating system and determine the adequacy of the allowance for loan losses. These
committees report the results of their respective oversight functions to our board of directors. In addition,
our board of directors receives information concerning asset quality measurements and trends on a
monthly basis. While we continue to adhere to prudent underwriting standards, our loan portfolio is not
immune to potential negative consequences arising as a result of general economic weakness such as, a
prolonged downturn in the housing market on a national scale. Decreases in real estate values could
adversely affect the value of property used as collateral for loans. In addition, adverse changes in the
economy could have a negative effect on the ability of borrowers to make scheduled loan payments, which
would likely have an adverse impact on earnings.
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
57
the property. In certain situations, the amount may be up to 90-95% LTV either with private mortgage
insurance being required for that portion of the residential loan in excess of 80% of the appraised value of
the property or where secondary financing is provided by a housing authority program second mortgage, a
community’s low/moderate income housing program, a religious or civic organization. Private mortgage
insurance is required for that portion of the residential first mortgage loan in excess of 80% of the
appraised value of the property.
Credit risk management involves a partnership between our relationship managers and our credit
approval, credit administration and collections personnel. Disciplined underwriting, portfolio monitoring
and early problem recognition are important aspects of maintaining our high credit quality standards and
low levels of nonperforming assets since our inception in 2002.
Acquired Loans. Loans acquired in acquisitions are initially recorded at fair value with no carryover
of the related allowance for credit losses. Acquired loans that have evidence of deterioration in credit
quality since origination and for which it is probable, at acquisition, that all contractually required payments
will not be collected are initially recorded at fair value without recording an allowance for loan losses.
Determining the fair value of the loans is determined using market participant assumptions in estimating
the amount and timing of principal and interest cash flows initially expected to be collected on the loans
and discounting those cash flows at an appropriate market rate of interest.
Under the accounting model for acquired loans, the excess of cash flows expected to be collected over
the carrying amount of the loans, referred to as the “accretable yield”, is accreted into interest income over
the life of the loans using the effective yield method. Accordingly, acquired loans are not subject to
classification as nonaccrual in the same manner as originated loans. Rather, acquired loans are considered
to be accruing loans because their interest income relates to the accretable yield recognized and not to
contractual interest payments. The excess of the loan’s contractually required payments over the cash flows
expected to be collected is the nonaccretable difference. As such, chargeoffs on acquired loans are first
applied to the nonaccretable difference and then to any allowance for loan losses recognized subsequent to
the acquisition. A decrease in expected cash flows in subsequent periods may indicate that the loan pool is
impaired, which would require the establishment of an allowance for loan losses by a charge to the
provision for loan losses.
Nonperforming Assets. Nonperforming assets include nonaccrual
loans and property acquired
through foreclosures or repossession. The following tables present nonperforming assets and additional
asset quality data for the dates indicated:
2014
2013
At December 31,
2012
(In thousands)
2011
2010
Nonaccrual loans:
Real estate loans:
Residential
. . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . .
Total non accrual loans . . . . . . . . . . . . . . . .
Property acquired through foreclosure or
$ — $1,003
3,220
—
—
142
3,362
$2,137
— 1,817
—
—
—
1,003
$2,166
307
— 1,175
90
—
—
—
3,738
3,954
$ 974
—
1,300
—
—
2,274
repossession, net
. . . . . . . . . . . . . . . . . . . . . .
Total nonperforming assets . . . . . . . . . . . . .
950
$4,312
829
$1,832
962
$4,916
—
$3,738
—
$2,274
Nonperforming assets to total assets . . . . . . . . . .
Nonaccrual loans to total loans . . . . . . . . . . . . . .
Total past due loans to total loans . . . . . . . . . . . .
0.39% 0.23% 0.81% 0.78% 0.57%
0.36% 0.16% 0.75% 1.01% 0.79%
0.86% 0.73% 0.75% 1.01% 0.79%
Accruing loans 90 days or more past due . . . . . . .
$1,998
$3,620
$ — $ — $ —
Non-performing assets exclude acquired loans that are accounted for as purchased credit impaired
loans, which totaled $1.9 million at December 31, 2014. Such loans otherwise meet our definition of a
58
nonperforming loan but are excluded because the loans are included in loan pools that are considered
performing. These loans are, however, 90 days or more past due and reflected as such in the table. 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.
Nonperforming assets totaled $4.3 million and represented 0.39% of total assets at December 31, 2014,
compared to $1.8 million and 0.23% of total assets at December 31, 2013.
Nonaccrual
loans totaled $3.4 million at December 31, 2014, an increase of $2.4 million from
December 31, 2013, a direct result of significant growth in our loan portfolio. Foreclosed real estate was
$950 thousand at December 31, 2014 an increase of $121 thousand compared to December 31, 2013,
reflecting foreclosed real estate acquired from Wilton Bank and Quinnipiac Bank and Trust Company.
Nonaccrual Loans. Loans greater than 90 days past due are put on nonaccrual status. Loans are also
placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is
doubtful. Interest previously accrued, but uncollected,
is reversed against current period income.
Subsequent interest payments received on nonaccrual loans are recognized as interest income, or recorded
as a reduction of principal if full collection of the loan is doubtful or if impairment of the collateral is
identified. 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. Total nonaccrual loans were $3.4 million at December 31,
2014, consisting of one commercial real estate mortgage loan and one residential mortgage loan.
At December 31, 2014, there were no commitments to lend additional funds to any borrower on
nonaccrual status.
Interest income that would have been recognized if loans on nonaccrual status had been current in
accordance with their original terms for the years ended December 31, 2014, 2013 and 2012 was $8
thousand, $23 thousand and $276 thousand, respectively. The amount of actual interest income recognized
on these loans was $190 thousand, $8 thousand and $113 thousand for the years ended December 31, 2014,
2013 and 2012, respectively.
Past Due Loans. When a loan is 15 days past due, we send the borrower a late notice. We also contact
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, we mail the borrower a letter reminding the borrower of the delinquency, and
attempt 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, we will send the
borrower a final demand for payment and may recommend foreclosure. A summary report of all loans 30
days or more past due is provided to our board of directors each month. Generally, loans greater than 90
days past due are put on nonaccrual status. The delinquency status of acquired loans accounted for as
purchased credit impaired loans are determined in accordance with their contractual repayment terms. At
December 31, 2014, accruing purchased credit impaired loans greater than 90 days past due totaled $1.9
million.
59
The following table presents past due loans as of December 31, 2014 and 2013:
31 – 60 Days
Past Due
61 – 90 Days
Past Due
Greater Than
90 Days
Total Past
Due
(In thousands)
As of December 31, 2014
Originated Loans
Residential real estate . . . . . . . . . . . . . . . .
$ —
$ —
Commercial real estate . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . .
Total originated loans
. . . . . . . . . . . . . .
Acquired Loans
Residential real estate . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . .
Home Equity . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
339
685
—
—
178
3
—
—
—
—
—
677
—
40
386
—
$ —
3,436
—
—
$ —
3,436
—
—
3,436
3,436
294
836
835
—
305
—
633
2,198
835
40
869
3
4,578
$8,014
Total acquired loans . . . . . . . . . . . . . . . .
1,205
Total loans . . . . . . . . . . . . . . . . . . . . . .
$1,205
1,103
$1,103
2,270
$5,706
As of December 31, 2013
Originated Loans
Residential real estate . . . . . . . . . . . . . . . .
$ —
$ —
Total originated loans
. . . . . . . . . . . . . .
Acquired Loans
Commercial real estate . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . .
Total acquired loans . . . . . . . . . . . . . . . .
—
—
—
—
—
—
—
—
—
—
$1,003
1,003
$1,003
1,003
797
2,508
315
3,620
797
2,508
315
3,620
Total loans . . . . . . . . . . . . . . . . . . . . . .
$ —
$ —
$4,623
$4,623
At December 31, 2014, total past due loans totaled $8.0 million and consisted of two originated
commercial mortgage loans and 35 acquired loans. At December 31, 2013, total past due loans totaled $4.6
million and consisted of one originated loan for a residential property in the midst of the probate process
and 14 acquired loans. The past due acquired loans primarily consist of residential construction loans
including a four unit condominium property and a single family residence.
Troubled Debt Restructurings. Loans are considered restructured in a troubled debt restructuring
when we have granted concessions to a borrower due to the borrower’s financial condition that we
otherwise would not have considered. These concessions may include modifications of the terms of the debt
such as reduction of the stated interest rate other than normal market rate adjustments, extension of
maturity dates, or reduction of principal balance or accrued interest. The decision to restructure a loan,
rather than aggressively enforcing the collection of the loan, may benefit us by increasing the ultimate
probability of collection.
Restructured loans are classified as accruing or non-accruing based on management’s assessment of
the collectability of the loan. Loans which are already on nonaccrual status at the time of the restructuring
generally remain on nonaccrual status for approximately six months before management considers such
loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and
60
when the borrower fails to comply with the restructured terms and management deems it unlikely that the
borrower will return to a status of compliance in the near term. Through December 31, 2014, all troubled
debt restructured loans were accruing at the time of the restructure.
Troubled debt restructurings are reported as such for at least one year from the date of
the
restructuring. In years after the restructuring, troubled debt restructured loans are removed from this
classification if the restructuring did not involve a below market rate concession and the loan is not deemed
to be impaired based on the terms specified in the restructuring agreement. As of December 31, 2014 there
were no significant commitments to lend additional funds to borrowers whose loans had been restructured.
The following table presents information on troubled debt restructured loans:
December 31,
2014
2013
2012
2011
2010
(In thousands)
Accruing troubled debt restructured loans:
Residential real estate . . . . . . . . . . . . . . . . . . . .
$1,965
$ 864
$ 864
$ — $ —
Commercial real estate . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . .
Accruing troubled debt restructured loans . . . .
216
—
92
1,338
3,611
—
—
97
642
194
—
—
794
203
2,218
— 1,415
—
57
—
—
1,603
1,852
260
3,633
Nonaccrual troubled debt restructured loans:
Commercial real estate . . . . . . . . . . . . . . . . . . .
Nonaccrual troubled debt restructured loans
. .
—
—
—
—
—
—
—
—
—
—
Total troubled debt restructured loans
. . . . .
$3,611
$1,603
$1,852
$260
$3,633
As of December 31, 2014 and 2013, loans classified as troubled debt restructurings totaled $3.6 million
and $1.6 million, respectively. The $3.6 million balance at December 31, 2014 consists of 9 loans. The TDR
additions for 2014 consisted of 2 commercial real estate loans and 4 commercial business loans. The $1.6
million balance at December 31, 2013 consists of three loans. The largest troubled debt restructured loan is
a residential real estate loan, which included a modification of certain payment terms and a below market
interest rate reduction on the portion of the loan which exceeded 80% of the loan to value ratio. The second
largest troubled debt restructured loan is a commercial business loan secured by business assets and
included the modification of certain payment terms to extend the loan amortization period and a below
market interest rate reduction.
Potential Problem Loans. We classify certain loans as “special mention”, “substandard”, or
“doubtful”, based on criteria consistent with guidelines provided by our banking regulators. Potential
problem loans represent loans that are currently performing, but for which known information about
possible credit problems of the related borrowers causes management to have doubts as to the ability of
such borrowers to comply with the present loan repayment terms and which may result in disclosure of
such loans as nonperforming at some time in the future. These loans are not included in the amounts of
nonaccrual or restructured loans presented above. We cannot predict the extent to which economic
conditions or other factors may impact borrowers and the potential problem loans. Accordingly, there can
be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual,
become restructured, or require increased allowance coverage and provision for loan losses. We have
identified approximately $9.3 million in potential problem loans at December 31, 2014. Potential problem
loans are assessed for loss exposure using the methods described in Note 7 to our Consolidated Financial
Statements under the caption “Credit Quality Indicators”.
We expect the levels of non-performing assets and potential problem loans to fluctuate in response to
changing economic and market conditions, and the relative sizes of the respective loan portfolios, along
with our degree of success in resolving problem assets. We take a proactive approach with respect to the
identification and resolution of problem loans. However, given the current state of the U.S. economy and,
more specifically, the real estate market, the level of non-performing assets may increase in future periods.
61
Allowance for Loan Losses
Establishing an appropriate level of allowance for loan losses, necessarily involves a high degree of
judgment. We use a methodology to systematically measure the amount of estimated loan loss exposure
inherent in our loan portfolio for purposes of establishing a sufficient allowance for loan losses. We evaluate
the adequacy of the allowance at least quarterly, and in determining our allowance for loan losses, we
estimate losses on specific loans, or groups of loans, where the probable loss can be identified and
reasonably determined. The balance of our allowance for loan losses is based on internally assigned risk
classifications of loans, historical loan loss rates and subsequent recoveries, changes in the nature of the
loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic
factors and the estimated impact of current economic conditions on certain historical loan loss rates. See
additional discussion regarding our allowance for loan losses under the caption “— Critical Accounting
Policies and Estimates”.
Our allowance for loan losses is our best estimate of the probable loan losses inherent in our loan
portfolio as of the balance sheet date. The allowance is increased by provisions charged to earnings and by
recoveries of amounts previously charged off, and is reduced by charge-offs on loans.
Our general practice is to identify problem credits early and recognize full or partial charge-offs as
promptly as practicable when it is determined that it is probable that the loan will not be repaid according
to its original contractual terms, including principal and interest. Full or partial charge-offs on collateral
dependent impaired loans are recognized when the collateral is deemed to be insufficient to support the
carrying value of the loan. We do not recognize a recovery when an updated appraisal
indicates a
subsequent increase in value of the collateral.
Our charge-off policies, which comply with standards established by our banking regulators, are
consistently applied from period to period. Charge-offs are recorded on a monthly basis, as incurred.
Partially charged-off loans continue to be evaluated on a monthly basis and additional charge-offs or loan
loss provisions may be recorded on the remaining loan balance based on the same criteria.
The estimation of loan loss exposure inherent in our loan portfolio includes, among other procedures,
identification of loss allocations for individual loans deemed to be impaired in accordance with GAAP, and
loss allocation factors for non-impaired loans based on Peer bank data, historical loss experience, credit
grade, delinquency factors and other similar credit quality indicators, adjusted for qualitative factors. We
periodically reassess and revise the loss allocation factors used in the assignment of loss exposure to
appropriately reflect our analysis of migrational loss experience. We analyze historical loss experience in the
various portfolios over periods deemed to be relevant to the inherent risk of loss in the respective portfolios
as of the balance sheet date. Revisions to loss allocation factors are not retroactively applied.
The methodology we use to measure the amount of estimated loan loss exposure includes an analysis
of individual loans deemed to be impaired. Impaired loans are loans for which it is probable that we will
not be able to collect all amounts due according to the contractual terms of the loan agreements and all
loans restructured in a troubled debt restructuring. Impaired loans do not include large groups of
smaller-balance homogeneous loans that are collectively evaluated for impairment, which consist of most
residential mortgage loans and consumer loans. Impairment is measured on a discounted cash flow method
based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or if the
loan is collateral dependent, at the fair value of the collateral less costs to sell. For collateral dependent
loans, we may adjust appraised values to reflect estimated market value declines or apply other discounts to
appraised values for unobservable factors resulting from our knowledge of circumstances associated with
the property.
62
The following table presents the activity in our allowance for loan losses and related ratios:
December 31,
2014
2013
2012
2011
2010
(Dollars in thousands)
Balance at beginning of period . . . . . . . . . . . . .
$ 8,382
$7,941
$6,425
$5,440
$4,380
Charge-offs:
Residential real estate . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . .
—
—
Construction . . . . . . . . . . . . . . . . . . . . . . . .
(100)
Home equity . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(3)
—
(261)
(166)
—
—
(4)
—
(60)
—
(5)
—
—
—
—
(84)
(254)
—
—
—
(6)
Total charge-offs . . . . . . . . . . . . . . . . . . . .
(103)
(170)
(326)
(84)
(260)
Recoveries:
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Business . . . . . . . . . . . . . . . . . .
Total recoveries . . . . . . . . . . . . . . . . . . . . .
425
4
429
Net (recoveries) charge-offs . . . . . . . . . . . . . . . .
Provision charged to earnings . . . . . . . . . . . . . .
(326)
2,152
26
—
26
144
585
21
—
21
20
—
20
9
—
9
305
1,821
64
1,049
251
1,311
Balance at end of period . . . . . . . . . . . . . . . . . .
$10,860
$8,382
$7,941
$6,425
$5,440
Net (recoveries) charge-offs to average loans . . . .
(0.05)% 0.03% 0.07% 0.02% 0.09%
Allowance for loan losses to total loans
. . . . . . .
1.17% 1.33% 1.50% 1.74% 1.87%
At December 31, 2014, our allowance for loan losses was $10.9 million and represented 1.17% of total
loans, compared to $8.4 million and 1.33% of total loans, at December 31, 2013. The decline in the ratio of
allowance for loan losses to total loans is driven by loans acquired from the Quinnipiac bank acquisition
that were recorded at fair value with no carryover of the related allowance for loan losses. For the years
ended December 31, 2014, 2013 and 2012, the provision for loan losses charged to earnings totaled $2.2
million, $585 thousand and $1.8 million, respectively. Net recoveries for the year ended December 31, 2014
were $326 thousand and represented 0.05% of average loans, primarily reflecting a recovery on a consumer
loan. For the year ended December 31, 2013, net charge-offs were $144 thousand and represented 0.03% of
average loans, primarily reflecting a charge-off associated with an impaired commercial real estate loan that
was paid off.
The carrying amount of total impaired loans at December 31, 2014 was $8.3 million and consisted of 8
commercial business loans, 5 commercial real estate loans, 1 residential real estate loan and 1 home equity
loan. This compares to a carrying amount of $3.7 million for total impaired loans at December 31, 2013.
The amount of allowance for loan losses related to impaired loans was $33 thousand and $145 thousand,
respectively, at December 31, 2014 and 2013.
63
The following tables present the allocation of the allowance for loan losses and the percentage of these
loans to total loans. The allocation below is neither indicative of the specific amounts or the loan categories
in which future charge-offs may occur, nor is it an indicator of any future loss trends. The allocation of the
allowance to each category does not restrict the use of the allowance to absorb any losses in any category.
At December 31,
2014
2013
2012
Percent of
Loan
Portfolio
Amount
Percent of
Loan
Portfolio
Amount
Percent of
Loan
Portfolio
Amount
(Dollars in thousands)
Residential real estate . . . . . . . . . . . . . . . . .
$ 1,431
18.83% $1,310
24.66% $1,230
27.22%
Commercial real estate . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . .
Unallocated . . . . . . . . . . . . . . . . . . . . . . .
5,480
1,102
205
2,638
4
—
56.06
6.80
1.95
16.05
0.31
—
3,616
1,032
190
2,225
9
—
49.96
3,842
53.73
8.15
2.14
14.96
0.13
—
929
220
1,718
2
—
6.25
2.08
10.71
0.01
—
Total allowance for loan losses . . . . . . . . .
$10,860
100.00% $8,382
100.00% $7,941
100.00%
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unallocated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
At December 31,
2011
2010
Percent of
Loan
Portfolio
Amount
Percent of
Loan
Portfolio
(Dollars in thousands)
28.37% $1,053
1,806
47.10
951
10.95
313
4.01
744
9.49
20
0.08
553
—
36.08%
38.58
13.20
5.77
6.14
0.23
—
Amount
$1,290
2,519
1,007
274
1,317
11
7
Total allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . .
$6,425
100.00% $5,440
100.00%
The allocation of the allowance for loan losses at December 31, 2014 reflects our assessment of credit
risk and probable loss within each portfolio. We believe that the level of the allowance for loan losses at
December 31, 2014 is appropriate to cover probable losses.
Investment Securities
We manage our investment securities portfolio to provide a readily available source of liquidity for
balance sheet management, to generate interest income and to implement interest rate risk management
strategies. Investment securities are designated as either available-for-sale, held to maturity or trading at the
time of purchase. We do not currently maintain a portfolio of trading securities. Investment securities
available-for-sale may be sold in response to changes in market conditions, prepayment risk, rate
fluctuations, liquidity, or capital requirements. Investment securities available-for-sale are reported at fair
value, with any unrealized gains and losses excluded from earnings and reported as a separate component of
shareholders’ equity, net of tax, until realized. Investment securities held to maturity are reported at
amortized cost.
64
The amortized cost and fair value of investment securities as of the dates indicated are presented in the
following table:
2014
December 31,
2013
2012
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
(In thousands)
Securities available for sale:
U.S Government and agency
obligations . . . . . . . . . . . . . . . . . . .
$24,554
$24,418
$ 5,997
$ 5,688
$ 5,997
$ 6,005
State agency and municipal
obligations . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . .
17,797
16,035
18,584
16,325
11,605
12,132
9,166
9,566
17,036
13,681
18,531
14,556
Government mortgage-backed
securities . . . . . . . . . . . . . . . . . . . .
5,567
5,682
1,133
1,211
1,872
1,966
Total securities available for sale . . . .
$63,953
$65,009
$27,901
$28,597
$38,586
$41,058
Securities held to maturity:
U.S Government and agency
obligations . . . . . . . . . . . . . . . . . . .
$ 1,010
$ 1,010
$ 1,021
$ 1,019
$ — $ —
State agency and municipal
obligations . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . .
Government mortgage-backed
9,179
1,000
9,179
985
11,461
1,000
11,461
973
3,903
1,000
3,903
904
securities . . . . . . . . . . . . . . . . . . . .
265
296
334
362
451
485
Total securities held to maturity . . . .
$11,454
$11,470
$13,816
$13,815
$ 5,354
$ 5,292
At December 31, 2014, the carrying value of our investment securities portfolio totaled $76.5 million
and represented 7% of total assets, compared to $42.4 million and 5% of total assets at December 31, 2013.
This increase of $34.1 million, or 80%, primarily reflects purchases outpacing maturities. There were no
Sales of available-for-sale securities during the year ended December 31, 2014.
The net unrealized gain position on our investment portfolio at December 31, 2014 and 2013 was $1.1
million and $695 thousand, respectively and included gross unrealized losses of $290 thousand and $349
thousand, respectively, as of December 31, 2014 and 2013. The gross unrealized losses at December 31,
2014 and 2013 were concentrated in U.S. Government and agency obligations reflecting interest rate
fluctuation. At December 31, 2014, we determined that there had been no deterioration in credit quality
subsequent to purchase and believes that all unrealized losses are temporary. All of our investment
securities are investment grade.
65
The following tables summarize the amortized cost and weighted average yield of debt securities in our
investment securities portfolio as of December 31, 2014 and 2013, based on remaining period to contractual
maturity. Information for mortgage-backed securities is based on the final contractual maturity dates
without considering repayments and prepayments.
At December 31, 2014
Securities available for sale:
U.S Government and agency
Due Within 1 Year
Amortized
Cost
Yield
Due 1 – 5 Years
Amortized
Cost
Due 5 – 10 Years
Amortized
Cost
Yield
Due After 10 Years
Amortized
Cost
Yield
Yield
(In Thousands)
obligations
. . . . . . . . . . . . .
$ 497
2.24% $3,998
1.43% $17,055
2.50% $ 3,004
2.56%
State agency and municipal
obligations
. . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . .
Government mortgage-backed
securities . . . . . . . . . . . . . . .
Total securities available for
—
5,764
—
1.77
—
4,150
—
4.26
9,297
6,121
3.13
2.38
8,500
—
3.83
—
—
—
99
2.64
—
—
5,468
2.36
sale . . . . . . . . . . . . . . . . .
$6,261
1.81% $8,247
2.87% $32,473
2.66% $16,972
3.13%
Securities held to maturity:
U.S Government and agency
obligations
. . . . . . . . . . . . .
$1,010
0.27% $ —
—% $ —
—% $ —
—%
State agency and municipal
obligations
. . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . .
Government mortgage-backed
securities . . . . . . . . . . . . . . .
Total securities held to
—
—
—
—
—
—
—
—
—
—
—
—
—
1,000
—
2.69
9,179
—
4.50
—
—
—
265
5.06
maturity . . . . . . . . . . . . .
$1,010
0.27% $ —
—% $ 1,000
2.69% $ 9,444
4.52%
At December 31, 2013
Securities available for sale:
U.S Government and agency
Due Within 1 Year
Amortized
Cost
Yield
Due 1 – 5 Years
Amortized
Cost
Due 5 – 10 Years
Amortized
Cost
Yield
Due After 10 Years
Amortized
Cost
Yield
Yield
(In Thousands)
obligations . . . . . . . . . . . . . .
$—
—% $ 1,000
1.29% $4,997
1.51% $ —
—%
State agency and municipal
obligations . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . .
Government mortgage-backed
securities . . . . . . . . . . . . . . .
Total securities available for
—
—
—
—
—
—
—
9,166
—
4.28
3,125
—
4.07
—
8,480
—
4.20
—
—
—
—
—
1,133
5.23
sale . . . . . . . . . . . . . . . . .
$—
—% $10,166
3.99% $8,122
2.49% $ 9,613
4.32%
Securities held to maturity:
U.S Government and agency
obligations . . . . . . . . . . . . . .
$—
—% $ 1,021
1.38% $ —
—% $ —
—%
State agency and municipal
obligations . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . .
Government mortgage-backed
securities . . . . . . . . . . . . . . .
Total securities held to
—
—
—
—
—
—
—
—
—
—
—
—
—
1,000
— 11,461
—
2.90
4.50
—
—
—
334
5.50
maturity . . . . . . . . . . . . . .
$—
—% $ 1,021
1.38% $1,000
2.90% $11,795
4.53%
66
Bank Owned Life Insurance or BOLI
BOLI amounted to $23.0 million as of December 31, 2014, reflecting our purchase of $10.0 million
and $12.5 million in life insurance coverage in the fourth quarter of 2013 and the third quarter of 2014,
respectively. The purchase of life insurance policies results in an income-earning asset on our consolidated
balance sheet that provides monthly tax-free income to us and also provides a means to mitigate increasing
employee benefit costs. We expect to benefit from the BOLI contracts as a result of the tax-free growth in
cash surrender value and death benefits that are expected to be generated over time. BOLI is included in our
Consolidated Balance Sheets at its cash surrender value. Increases in the cash surrender value are reported
as a component of noninterest income in our Consolidated Statements of Income.
Deposit Activities and Other Sources of Funds
Our sources of funds include deposits, brokered certificates of deposit, FHLBB borrowings and
proceeds from the sales, maturities and payments of loans and investment securities. Total deposits
represented 76% of our total assets at December 31, 2014. While scheduled loan and securities repayments
are a relatively stable source of funds, loan and investment security prepayments and deposit inflows are
influenced by prevailing interest rates and local economic conditions and are inherently uncertain.
Deposits
We offer a wide variety of deposit products and rates to consumer and business customers consistent
with FDIC regulations. Our pricing committee meets regularly to determine pricing and marketing
initiatives. In addition to being an important source of funding for us, deposits also provide an ongoing
stream of fee revenue.
We participate in the Certificate of Deposit Account Registry Service, or CDARS, program. We use
CDARS to place customer funds into certificate of deposit accounts issued by other participating banks.
These transactions occur in amounts that are less than FDIC insurance limits to ensure that deposit
customers are eligible for FDIC insurance on the full amount of their deposits. Reciprocal amounts of
deposits are received from other participating banks that do the same with their customer deposits, and, to
a lesser extent, we also execute one-way buy transactions. CDARS deposits are considered to be brokered
deposits for bank regulatory purposes. We consider the reciprocal deposit balances to be in-market deposits
as distinguished from traditional out-of-market brokered deposits.
Time deposits may also be generated through the use of a listing service. We subscribe to a listing
service, accessible to financial institutions, in which we may advertise our time deposit rates in exchange for
a set subscription fee. Interested financial institutions then contact us directly to acquire a time certificate of
deposit. There is no third party brokerage service involved in this transaction.
The following table sets forth the composition of our deposits for the dates indicated:
At December 31,
2014
2013
Amount
Percent
Weighted
Average
Rate
Amount
Percent
Weighted
Average
Rate
(Dollars in thousands)
Noninterest-bearing demand . . . .
$166,030
19.87% —% $118,618
17.93% —%
NOW . . . . . . . . . . . . . . . . . . . .
Money Market . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
Savings
Time . . . . . . . . . . . . . . . . . . . . .
60,321
216,180
84,457
308,451
7.22
25.88
10.11
36.92
0.11
0.46
0.33
0.88
73,652
164,579
107,692
197,004
11.13
24.88
16.28
29.78
0.12
0.45
0.46
0.72
Total Deposits . . . . . . . . . . . . .
$835,439
100.00% 0.58% $661,545
100.00% 0.43%
67
2012
Amount
Percent
Weighted
Average
Rate
(Dollars in thousands)
Noninterest-bearing demand . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 78,120
16.91% —%
NOW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33,722
94,090
136,101
120,048
7.30
20.36
29.45
25.98
0.14
0.68
0.82
0.71
Total Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$462,081
100.00% 0.56%
Total deposits were $835.4 million at December 31, 2014, an increase of $173.9 million, or 26%, from
the year ended December 31, 2013. Of the total increase, $100.6 million, or 58%, was attributable to
deposits acquired as a result of the Quinnipiac Bank and Trust Company acquisition.
Time deposits, excluding CDARS, increased by $64.9 million, or 39%, from year-end 2013, reflecting
time deposits acquired from Quinnipiac Bank and Trust Company. Time deposits, excluding CDARS were
$232.4 million at December 31, 2014 compared to the December 31, 2013 balance of $167.4 million and
CDARS deposits were $76.1 million at December 31, 2014 compared to $29.6 million at December 31,
2013. Reciprocal customer deposits comprised $25.9 million, or 35%, of our total CDARS balance at
December 31, 2014.
During 2014, money market accounts increased $51.6 million, or 31%, reflecting promotions for our
premium money market
six months.
Noninterest-bearing demand deposits grew by $47.4 million, or 40%, and NOW accounts decreased $13.3
million, or 18% due to customer withdrawals outpacing new deposits. Savings accounts were $84.5 million
at December 31, 2014, down by $23.2 million, or 22%, from December 31, 2013.
guaranteed rate
an attractive
including
accounts
for
At December 31, 2014 and 2013, time deposits and CDARS, with a denomination of $100 thousand or
more totaled $239.8 million and $150.8 million, respectively, maturing during the periods indicated in the
table below:
December 31,
2014
2013
(Dollars in thousands)
Maturing:
Within 3 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After 3 but within 6 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After 6 months but within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 47,918
49,511
92,502
49,885
$ 71,221
22,236
40,204
17,152
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$239,816
$150,813
The Bank is a member of the FHLBB, which is part of a twelve district Federal Home Loan Bank
System. Members are required to own capital stock of the FHLBB, and borrowings are collateralized by
qualifying assets not otherwise pledged (principally single-family residential mortgage loans and securities).
The maximum amount of credit that the FHLBB will extend varies from time to time, depending on its
policies and the amount of qualifying collateral the member can pledge. The Bank had satisfied its
collateral requirement at December 31, 2014.
We utilize advances from the FHLBB as part of our overall funding strategy and to meet short-term
liquidity needs. Total FHLBB advances were $129.0 million at December 31, 2014 compared to $44.0
million at December 31, 2013. The increase of $85.0 million reflects increased demand for FHLBB
borrowings to meet short term liquidity needs.
68
Advances payable to the FHLBB include short-term advances with original maturity dates of one year
or less. The following table sets forth certain information concerning short-term FHLBB advances as of
and for the periods indicated in the following table:
Year Ended December 31,
2014
2013
2012
(Dollars in thousands)
As of and for the period ending:
Average amount outstanding during the period . . . . . . . . . . .
$ 37,129
$39,167
$29,250
Amount outstanding at end of period . . . . . . . . . . . . . . . . .
Highest month end balance during the period . . . . . . . . . . . .
Weighted average interest rate at end of period . . . . . . . . . . .
Weighted average interest rate during the period . . . . . . . . . .
107,000
107,000
12,000
60,000
51,000
51,000
0.26%
0.23%
0.41%
0.28%
0.21%
0.23%
Derivative Instruments
The Company uses interest rate swap instruments to fix the interest rate on its FHLB borrowings, all of
which are designated as cash flow hedges. The hedge strategy converts the LIBOR based rate of interest on
certain FHLB advances to fixed interest rates, thereby protecting the Bank from floating interest rate
variability. At December 31, 2014, the Company held derivative financial instruments with a total notional
amount of $50 million.
Information about derivative instruments at December 31, 2014 was as follows:
Cash flow hedge:
Interest rate swap on FHLB advance . . . . . . . . . .
Interest rate swap on forward-starting FHLB
Notional
Amount
Maturity
Received
Paid
(Dollars in thousands)
Fair
Value
$25,000
4.7 years
0.26% 1.62% $ (73)
advance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$25,000
5.0 years
0.26% 1.83% $(113)
Liquidity and Capital Resources
Liquidity Management
Liquidity is defined as the ability to generate sufficient cash flows to meet all present and future
funding requirements at reasonable costs. Our primary source of liquidity is deposits. While our generally
preferred funding strategy is to attract and retain low cost deposits, our ability to do so is affected by
competitive interest rates and terms in the marketplace. Other sources of funding include discretionary use
of purchased liabilities (e.g., FHLBB term advances and other borrowings), cash flows from our investment
securities portfolios, loan repayments and earnings. Investment securities designated as available-for-sale
may also be sold in response to short-term or long-term liquidity needs.
Our and the Bank’s liquidity positions are monitored daily by management. The Bank’s board of
directors has authorized our ALCO, as ALCO for the Bank’s board of directors. ALCO establishes
guidelines to ensure maintenance of prudent levels of liquidity. ALCO reports to the Bank’s board of
directors, as well as our board of directors.
The Bank has a detailed liquidity funding policy and a contingency funding plan that provide for the
prompt and comprehensive response to unexpected demands for liquidity. We employ a stress testing
methodology to estimate needs for contingent funding that could result from unexpected outflows of funds
in excess of “business as usual” cash flows. The Bank has established collateralized borrowing capacity with
the Bankers’ Bank Northeast and also maintains additional collateralized borrowing capacity with the
FHLBB in excess of levels used in the ordinary course of business. Our sources of liquidity include cash,
69
unpledged investment securities, borrowings from the FHLBB and the brokered deposit market. At
December 31, 2014, our liquidity sources totaled $578.7 million and represented 53% of total assets,
compared to $424.1 million and 54% of total assets at December 31, 2013 and $194.0 million and 32% of
total assets at December 31, 2012.
Capital Resources
Total shareholders’ equity was $129.2 million at December 31, 2014, compared to $69.5 million at
December 31, 2013. The $59.7 million, or 86%, increase is primarily a result of the approximately $45
million net raised in the IPO and from shares issued as a result of the Quinnipiac Bank and Trust Company
acquisition. The ratio of total equity to total assets was 11.75% at December 31, 2014, which compares to
8.91% at December 31, 2013. Tangible book value per common share at December 31, 2014 and 2013 was
$16.35 and $15.46, respectively.
The Bank is subject to various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the
Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures
of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to
maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1
capital to average assets, as defined by regulation. At December 31, 2014, the Bank met all capital adequacy
requirements to which it was subject and exceeded the regulatory minimum capital levels to be considered
well-capitalized under the regulatory framework for prompt corrective action. At December 31, 2014, the
Bank’s ratio of total capital to risk-weighted assets was 13.55%, Tier 1 capital to risk-weighted assets was
12.47% and Tier 1 capital to average assets was 11.12%.
In 2011, we elected to participate in the Treasury’s Small Business Lending Fund Program, or SBLF.
The SBLF is a $30 billion fund established under the Small Business Jobs Act of 2010 to encourage lending
to small businesses by providing Tier 1 Capital to qualified community banks with assets of less than $10
billion. The SBLF funding expanded our ability to lend to small businesses, which will in turn help
stimulate the economy and promote job growth.
On August 4, 2011, the Treasury approved our request to repay the Treasury’s preferred stock
investment through participation in the SBLF. We sold 10,980 shares of Senior Non-Cumulative Perpetual
Preferred Stock, Series C, no par value, or Series C Preferred Stock, having a liquidation preference of
$1,000 per preferred share, to the Treasury and simultaneously repurchased all of the Series A Preferred
Stock and Series B Preferred Stock sold to the Treasury in 2009. The transaction resulted in net capital
proceeds to us of $5.9 million, of which at least 90% was invested in the Banks as Tier 1 Capital.
Our shareholders are entitled to dividends when and if declared by our board of directors out of funds
legally available. Connecticut law prohibits us from paying cash dividends except from our net profits, which
are defined by state statutes. The payment of dividends is subject to additional restrictions in connection
with our Series C Preferred Stock. In the years ended December 31, 2014, 2013 and 2012, we paid cash
dividends on our Series C Preferred Stock of $110 thousand, $111 thousand and $132 thousand,
respectively. To date, we have not declared or paid dividends on our common stock. We did not repurchase
any of our common stock during the years ended December 31, 2014, 2013 or 2012.
Contractual Obligations
The following table summarizes our contractual obligations to make future payments as of
December 31, 2014. Payments for borrowings do not include interest. Payments related to leases are based
on actual payments specified in the underlying contracts.
70
Payments Due by Period
Total
Less Than
1 Year
1 – 3
Years
4 – 5
Years
After
5 Years
(in thousands)
Contractual Obligations:
FHLB advances
. . . . . . . . . . . . . . . . . . . . . . . .
$129,000
$109,000
$20,000
$ — $ —
Operating lease agreements . . . . . . . . . . . . . . . . .
9,286
1,788
2,926
1,636
2,936
Time deposits with stated maturity dates . . . . . . .
308,451
244,674
44,119
19,658
—
Total contractual obligations . . . . . . . . . . . . . .
$446,737
$355,462
$67,045
$21,294
$2,936
Off-Balance Sheet Instruments
In the normal course of business, we are a party to financial instruments with off-balance sheet risk to
meet the financing needs of our customers. These financial instruments include commitments to extend
credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the financial statements. The contractual amounts of these instruments reflect the extent of
involvement we have in particular classes of financial instruments.
We enter into contractual commitments to extend credit, normally with fixed expiration dates or
termination clauses, at specified rates and for specific purposes. Substantially all of the Bank’s commitments
to extend credit are contingent upon customers maintaining specific credit standards at the time of loan
funding. The Bank minimizes its exposure to loss under these commitments by subjecting them to credit
approval and monitoring procedures.
Commitments to extend credit totaled $156.4 million and $117.9 million, respectively at December 31,
2014 and 2013. The following table summarizes our commitments to extend credit as of the dates indicated.
Since commitments associated with letters of credit and commitments to extend credit may expire unused,
the amounts shown do not necessarily reflect the actual future cash funding requirements. We manage our
liquidity in light of the aggregate amounts of commitments to extend credit and outstanding standby letters
of credit in effect from time to time to ensure that we will have adequate sources of liquidity to fund such
commitments and honor drafts under such letters of credit.
As of December 31, 2014
Other Commitments:
Amount of Commitment Expiration per Period
Total
Less Than
1 Year
1 – 3
Years
4 – 5
Years
After
5 Years
(in thousands)
Loan Commitments . . . . . . . . . . . . . . . . . . . . . .
Undisbursed construction loans . . . . . . . . . . . . . .
Unused home equity lines of credit . . . . . . . . . . . .
$ 83,013
61,095
12,340
$52,370
9,218
138
$14,791
11,104
799
$2,556
$13,296
— 40,773
10,622
781
Total other commitments . . . . . . . . . . . . . . . . .
$156,448
$61,726
$26,694
$3,337
$64,691
As of December 31, 2013
Other Commitments:
Amount of Commitment Expiration per Period
Total
Less Than
1 Year
1 – 3
Years
4 – 5
Years
After
5 Years
(in thousands)
Loan Commitments . . . . . . . . . . . . . . . . . . . . . .
Undisbursed construction loans . . . . . . . . . . . . . .
$ 61,633
44,670
$35,236
7,613
$ 7,528
6,600
$5,267
$13,602
— 30,457
Unused home equity lines of credit . . . . . . . . . . . .
11,575
143
823
1,061
9,548
Total other commitments . . . . . . . . . . . . . . . . .
$117,878
$42,992
$14,951
$6,328
$53,607
71
Recently Issued Accounting Pronouncements
See Note 1 to our Consolidated Financial Statements for details of recently issued accounting
pronouncements and their expected impact on our financial statements.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Asset/Liability Management and Interest Rate Risk
An effective asset/liability management process must balance the risks and rewards from both short
and long-term interest rate risks in determining management strategy and action. Our ALCO facilitates and
manages this process with the primary goal of maximizing net income and net economic value over time in
changing interest rate environments, subject to board of director approved risk limits. ALCO regularly
reviews various earnings at risk scenarios for changes in rates, as well as longer-term earnings at risk greater
than five years.
The principal strategies we use to manage interest rate risk include (i) emphasizing the origination,
purchase and retention of adjustable rate loans, and the origination and purchase of loans with maturities
matched with those of the deposits and borrowings funding the loans, (ii) investing in debt securities with
relatively short maturities and/or average lives and (iii) classifying a significant portion of its investment
portfolio as available for sale so as to provide sufficient flexibility in liquidity management. By our strategy
of limiting the Bank’s risk to rising interest rates, we are also limiting the benefit of falling interest rates.
We measure interest rate risk using simulation analysis to calculate earnings and equity at risk. These
risk measures are quantified using simulation software from one of the leading firms in the field of asset/
liability modeling. Key assumptions relate to the behavior of interest rates and spreads, prepayment speeds
and the run-off of deposits. From such simulations, interest rate risk, or IRR, is quantified and appropriate
strategies are formulated and implemented. We manage IRR by using two primary risk measurement
techniques: simulation of net interest income and simulation of economic value of equity. These two
measurements are complementary and provide both short-term and long-term risk profiles for us. Because
income simulations assume that our balance sheet will remain static over the simulation horizon, the results
do not reflect adjustments in strategy that ALCO could implement in response to rate shifts.
We use net interest income at risk simulation to measure the sensitivity of net interest income to
changes in market rates over a forward twelve-month period. This simulation captures underlying product
behaviors, such as asset and liability repricing dates, balloon dates, interest rate indices and spreads, rate
caps and floors, as well as other behavioral attributes. The simulation of net interest income also requires a
number of key assumptions such as: (i) future balance sheet volume and mix assumptions that are
management judgments based on estimates and historical experience; (ii) prepayment projections for loans
and securities that are projected under each interest rate scenario using internal and external mortgage
analytics; (iii) new business loan rates that are based on recent new business origination experience; and
(iv) deposit pricing assumptions that are based on Office of the Comptroller of the Currency, or OCC,
guidelines for non-maturity deposits reflecting the Bank’s limited history and management judgment.
Combined, these assumptions can be inherently uncertain, and as a result, actual results may differ from
simulation forecasts due to the timing, magnitude and frequency of interest rate changes, future business
conditions, as well as unanticipated changes in management strategies.
We use two sets of standard scenarios to measure net interest income at risk. For the “core” scenario,
rate changes are ramped over a twelve-month horizon based upon a parallel yield curve shift and then
maintained at those levels over the remainder of the simulation horizon. Parallel shock scenarios assume
instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Simulation
analysis involves projecting a future balance sheet structure and interest income and expense under the
various rate scenarios. Internal policy regarding internal rate risk simulations currently specifies that for
instantaneous parallel shifts of the yield curve, estimated net income at risk for the subsequent one-year
period should not decline by more than: 6% for a 100 basis point shift; 12% for a 200 basis point shift; and
18% for a 300 basis point shift.
72
The following tables set forth the estimated percentage change in our net interest income at risk over
one-year simulation periods beginning December 31, 2014 and 2013:
Parallel Ramp
Rate Changes (basis points)
Estimated Percent Change
in Net Interest Income
At December 31,
2014
2013
-100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.95)%
(0.73)%
+200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4.00)
(3.63)
Parallel Shock
Rate Changes (basis points)
-100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+300 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated Percent Change
in Net Interest Income
At December 31,
2014
2013
(3.26)%
(3.07)
(5.61)
(9.00)
(1.97)%
(3.18)
(5.93)
(10.20)
The net interest income at risk simulation results indicate that as of December 31, 2014, we remain
liability sensitive. The liability sensitivity is due to the expansion in the balance sheet due to the Quinnipiac
Bank and Trust acquisition and the addition of short-term FHLB advances.
We conduct economic value of equity at risk simulation in tandem with net interest income
simulations, to ascertain a longer term view of our interest rate risk position by capturing longer-term
re-pricing risk and options risk embedded in the balance sheet. It measures the sensitivity of economic value
of equity to changes in interest rates. Economic value of equity at risk simulation values only the current
balance sheet and does not incorporate the growth assumptions used in income simulation. As with the net
interest income simulation, this simulation captures product characteristics such as loan resets, repricing
terms, maturity dates, rate caps and floors. Key assumptions include loan prepayment speeds, deposit
pricing elasticity and non-maturity deposit attrition rates. These assumptions can have significant impacts
on valuation results as the assumptions remain in effect for the entire life of each asset and liability. We
conduct non-maturity deposit behavior studies on a periodic basis to support deposit assumptions used in
the valuation process. All key assumptions are subject to a periodic review.
Base case economic value of equity at risk is calculated by estimating the net present value of all future
cash flows from existing assets and liabilities using current interest rates. The base case scenario assumes
that future interest rates remain unchanged.
The following table sets forth the estimated percentage change in our economic value of equity at risk,
assuming various shifts in interest rates:
Parallel Shock
Rate Changes (basis points)
-100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+300 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated Percent Change
in Economic Value of Equity
At December 31,
2014
(0.50)%
(8.50)
(18.20)
(26.90)
2013
(4.30)%
(9.30)
(20.10)
(29.20)
73
While ALCO reviews and updates simulation assumptions and also periodically back-tests the
simulation results to ensure that the assumptions are reasonable and current, income simulation may not
always prove to be an accurate indicator of interest rate risk or future net interest margin. Over time, the
repricing, maturity and prepayment characteristics of financial instruments and the composition of our
balance sheet may change to a different degree than estimated. Simulation modeling assumes a static
balance sheet, with the exception of certain modeled deposit mix shifts from low-cost core savings deposits
to higher-cost time deposits in rising rate scenarios as noted above. Due to the low current level of market
interest rates, the banking industry has experienced relatively strong growth in low-cost FDIC-insured core
savings deposits over the past several years. ALCO recognizes that a portion of these increased levels of
low-cost balances could shift into higher yielding alternatives in the future, particularly if interest rates rise
and as confidence in financial markets strengthens, and has modeled increased amounts of deposit shifts
out of
these low-cost categories into higher-cost alternatives in the rising rate simulation scenarios
presented above.
It should be noted that the static balance sheet assumption does not necessarily reflect our expectation
for future balance sheet growth, which is a function of the business environment and customer behavior.
Another significant simulation assumption is the sensitivity of core savings deposits to fluctuations in
interest rates. Income simulation results assume that changes in both core savings deposit rates and balances
are related to changes in short-term interest rates. The assumed relationship between short-term interest
rate changes and core deposit rate and balance changes used in income simulation may differ from ALCO’s
estimates. Lastly, mortgage-backed securities and mortgage loans involve a level of risk that unforeseen
changes in prepayment speeds may cause related cash flows to vary significantly in differing rate
environments. Such changes could affect the level of reinvestment risk associated with cash flow from these
instruments, as well as their market value. Changes in prepayment speeds could also increase or decrease the
amortization of premium or accretion of discounts related to such instruments, thereby affecting interest
income.
Impact of Inflation
Our financial statements and related data contained in this annual report have been prepared in
accordance with GAAP, which require the measure of financial position and operating results in terms of
historic dollars, without considering changes in the relative purchasing power of money over time due to
inflation.
Inflation generally increases the costs of funds and operating overhead, and to the extent loans and
other assets bear variable rates, the yields on such assets. Unlike most industrial companies, virtually all of
the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally
have a more significant effect on the performance of a financial institution than the effects of general levels
of inflation. In addition, inflation affects a financial institution’s cost of goods and services purchased, the
cost of salaries and benefits, occupancy expense and similar items. Inflation and related increases in interest
rates generally decrease the market value of investments and loans held and may adversely affect liquidity,
earnings and shareholders’ equity.
74
Item 8.
Financial Statements and Supplementary Data
The financial statements and supplementary data required by this item are presented in the order
shown below:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2014 and 2013
Consolidated Statements of Income for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
75
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Bankwell Financial Group, Inc. and Subsidiaries
New Canaan, Connecticut
We have audited the accompanying consolidated balance sheets of Bankwell Financial Group, Inc. and
Subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements
of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three
year period ended December 31, 2014. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Bankwell Financial Group, Inc. and Subsidiaries as of
December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for each
of the years in the three year period ended December 31, 2014, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Whittlesey & Hadley, P.C.
Hartford Connecticut
March 13, 2015
76
Bankwell Financial Group, Inc.
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
December 31,
2014
2013
ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Held to maturity investment securities, at amortized cost
. . . . . . . . . . . . . . . .
Available for sale investment securities, at fair value . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans receivable (net of allowance for loan losses of $10,860 and $8,382 at
December 31, 2014 and 2013, respectively) . . . . . . . . . . . . . . . . . . . . . . . . .
Foreclosed real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
48,559
11,454
65,009
586
915,981
950
3,323
6,109
11,910
23,028
2,589
848
7,156
2,029
$1,099,531
$ 82,013
13,816
28,597
100
621,830
829
2,360
4,834
7,060
10,031
—
481
5,845
1,822
$779,618
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits
Noninterest bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 166,030
669,409
835,439
$118,618
542,927
661,545
Advances from the Federal Home Loan Bank . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
129,000
5,882
970,321
44,000
4,588
710,133
Commitments and contingencies (Note 11)
Shareholders’ equity
Preferred stock, senior noncumulative perpetual, Series C, no par; 10,980 shares
issued at December 31, 2014 and 2013, respectively; liquidation value of $1,000
per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, no par value; 10,000,000 shares authorized, 7,185,482 and
3,876,393 shares issued at December 31, 2014 and 2013, respectively . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,980
10,980
107,265
10,434
531
129,210
52,105
5,976
424
69,485
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,099,531
$779,618
See notes to consolidated financial statements
77
Bankwell Financial Group, Inc.
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
Interest and dividend income
Interest and fees on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and dividends on securities . . . . . . . . . . . . . . . . . . . . . .
Interest on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . .
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Interest expense
Interest expense on deposits . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision for loan losses. . . . . . . . . . . . . .
Noninterest income
Gains and fees from sales of loans . . . . . . . . . . . . . . . . . . . . . . .
Gain on bargain purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . .
Net gain (loss) on sale of available for sale securities
Service charges and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of foreclosed real estate, net . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense
Salaries and employee benefits
. . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merger and acquisition related expenses . . . . . . . . . . . . . . . . . . .
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreclosed real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax expense . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to common shareholders . . . . . . . . . . . . . .
Earnings Per Common Share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted Average Common Shares Outstanding:
$
$
$
$
Year Ended December 31,
2013
2012
2014
33,409
2,052
128
35,589
3,295
634
3,929
31,660
2,152
29,508
1,313
—
—
643
497
—
588
3,041
13,534
4,422
1,801
1,289
1,194
674
650
488
133
36
1,591
25,812
6,737
2,169
4,568
4,458
0.78
0.78
$
$
$
$
$
26,599
1,409
84
28,092
2,233
532
2,765
25,327
585
24,742
2,020
1,333
648
416
31
64
211
4,723
11,578
3,420
908
1,349
1,595
927
330
333
18
8
1,654
22,120
7,345
2,184
5,161
5,050
1.46
1.44
$
$
$
$
$
22,329
2,033
35
24,397
2,367
825
3,192
21,205
1,821
19,384
18
—
(18)
314
—
—
31
345
9,451
3,004
—
1,209
1,546
333
381
365
—
9
1,560
17,858
1,871
657
1,214
1,082
0.39
0.38
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,577,942
5,605,512
3,395,779
3,451,393
2,767,850
2,864,700
See notes to consolidated financial statements
78
Bankwell Financial Group, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,568
$ 5,161
$1,214
Year Ended December 31,
2014
2013
2012
Other comprehensive income (loss):
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) on available for sale securities . . . . . . . .
Reclassification adjustment for (gain) loss realized in net income . . . . . . .
Net change in unrealized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . .
361
—
361
(1,129)
1,130
(648)
18
(1,777)
1,148
Tax effect – (expense) benefit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(141)
690
Unrealized gains (losses) on securities, net of tax . . . . . . . . . . . . . . . .
220
(1,087)
Unrealized losses on interest rate swap:
Unrealized losses on interest rate swaps designated as cash flow hedge . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect – benefit
Unrealized losses on interest rate swap, net of tax . . . . . . . . . . . . . . . .
(186)
73
(113)
—
—
—
(447)
701
—
—
—
Total other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . .
107
(1,087)
701
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,675
$ 4,074
$1,915
See notes to consolidated financial statements
79
Bankwell Financial Group, Inc.
Consolidated Statements of Shareholders’ Equity
(In thousands, except share amounts)
Number of
Outstanding
Shares
Preferred
Stock
Common
Stock
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
Total
Balance at January 1, 2012 . . . . . . . . . . . . . . . . 2,797,200 $10,980 $ 37,554
$ (156)
$
810
$ 49,188
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income, net of tax . . . . . . .
preferred stock cash dividends . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . .
—
—
—
—
Issuance of restricted stock . . . . . . . . . . . . . . .
49,500
—
—
—
—
—
—
—
—
563
—
Balance at December 31, 2012 . . . . . . . . . . . . . . 2,846,700
10,980
38,117
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income, net of tax . . . . . . .
Preferred stock cash dividends . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . .
Capital from exercise of stock options . . . . . . . .
Capital from private placement . . . . . . . . . . . . .
—
—
—
—
—
—
—
—
—
—
—
—
—
—
343
467
— 13,178
Issuance of restricted stock . . . . . . . . . . . . . . .
87,456
Forfeitures of restricted stock . . . . . . . . . . . . . .
(1,916)
Stock options exercised . . . . . . . . . . . . . . . . .
46,640
Stock issuance from private placement . . . . . . . .
897,513
—
—
—
—
—
—
—
—
Balance at December 31, 2013 . . . . . . . . . . . . . . 3,876,393
10,980
52,105
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income, net of tax . . . . . . .
Preferred stock cash dividends . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . .
Capital from exercise of stock options . . . . . . . .
—
—
—
—
—
—
—
—
573
207
Issuance of 2,702,703 shares, net of expenses . . . . 2,702,703
— 44,704
Issuance of restricted stock . . . . . . . . . . . . . . .
127,610
Forfeitures of restricted stock . . . . . . . . . . . . . .
(51,651)
Stock options exercised . . . . . . . . . . . . . . . . .
20,305
Stock issuance from acquisition of Quinnipiac
Bank and Trust Company . . . . . . . . . . . . . .
510,122
—
—
—
—
—
—
—
9,676
1,214
—
(132)
—
—
926
5,161
—
(111)
—
—
—
—
—
—
—
5,976
4,568
—
(110)
—
—
—
—
—
—
—
—
701
—
—
—
1,214
701
(132)
563
—
1,511
—
51,534
5,161
(1,087)
(1,087)
—
—
—
—
—
—
—
—
424
—
107
—
—
—
—
—
—
—
—
(111)
343
467
13,178
—
—
—
—
69,485
4,568
107
(110)
573
207
44,704
—
—
—
9,676
Balance at December 31, 2014 . . . . . . . . . . . . . . 7,185,482 $10,980 $107,265
$10,434
$
531
$129,210
See notes to consolidated financial statements
80
Bankwell Financial Group, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
2013
2012
2014
Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
$
4,568
$
5,161
$
1,214
Net amortization of premiums and discounts on investment securities . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit for deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (gain) loss on sales of available for sale securities . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in cash surrender value of bank-owned life insurance . . . . . . . . . . .
Loan principal sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of loans
Net gain on sales of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amortization (accretion) of purchase accounting adjustments . . . . . . . .
Gain on sale of foreclosed real estate . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on bargain purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in:
Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities
Proceeds from principal repayments on available for sale securities . . . . . . . . . .
Proceeds from principal repayments on held to maturity securities . . . . . . . . . .
Net proceeds from sales and calls of available for sale securities . . . . . . . . . . . .
Purchases of available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of held to maturity securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition, net of cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of foreclosed real estate . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used by investing activities . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities
124
2,152
(696)
—
1,239
(497)
(27,282)
28,109
(1,313)
573
656
—
—
1,120
(619)
58
978
9,170
10,189
2,353
15,920
(53,772)
—
(12,500)
2,546
(200,118)
(2,042)
(1,275)
—
(238,699)
97
585
(357)
(648)
666
—
(72,589)
74,509
(2,020)
343
(80)
(64)
(1,333)
479
(185)
(501)
(1,114)
2,949
723
180
10,514
—
(7,623)
(10,031)
30,883
(77,004)
(908)
(134)
1,693
(51,707)
130
1,821
(777)
18
612
—
(575)
1,765
(18)
563
—
—
—
539
206
(1,432)
4,101
8,167
1,103
480
54,973
(6,997)
—
—
—
(162,026)
(684)
(1,034)
—
(114,185)
Net change in time certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in other deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds (repayments) from short term FHLB advances . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
Net repayments from long term FHLB advances
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid on preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing activities. . . . . . . . . . . . . . . . . . . . . .
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . .
$ 111,247
(37,973)
85,000
(7,000)
44,704
207
(110)
196,075
(33,454)
$ 66,538
68,772
(47,000)
—
13,178
467
(111)
101,844
53,086
$
(230)
95,216
33,000
—
—
—
(132)
127,854
21,836
Cash and cash equivalents:
Beginning of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
82,013
$ 48,559
28,927
$ 82,013
7,091
$ 28,927
Supplemental disclosures of cash flows information:
Cash paid for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,985
2,222
$
2,527
2,872
$
3,208
1,984
Acquisition of noncash assets and liabilities:
Assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
112,498
(107,958)
34,869
(64,446)
Noncash investing and financing activities
Loans transferred to foreclosed real estate . . . . . . . . . . . . . . . . . . . . . . .
—
52
—
—
962
See notes to consolidated financial statements
81
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations and Summary of Significant Accounting Policies
Bankwell Financial Group, Inc. (the “Company” or “Bankwell”) is a bank holding company
headquartered in New Canaan, Connecticut. The Company offers a broad range of financial services
through its banking subsidiary, Bankwell Bank, (the “Bank”). The Bank was originally chartered as two
separate banks, The Bank of New Canaan (“BNC”) and The Bank of Fairfield (“TBF”). In
September 2013, BNC and TBF were merged and rebranded as “Bankwell Bank.” In November 2013, the
Bank acquired The Wilton Bank (“Wilton”), which added one branch and approximately $25.1 million in
loans and $64.2 million in deposits. In addition, 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. See Note 4, Mergers and Acquisitions, for further information on the
acquisitions.
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 opened a branch in Norwalk,
Connecticut on March 1, 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 4, Mergers
and Acquisitions, for further information on the acquisition.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and the Bank. All
significant intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates
The accounting and reporting policies of the Company conform to accounting principles generally
accepted in the United States of America (“GAAP”) and general practices within the banking industry. In
preparing the consolidated financial statements, management
is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets
and liabilities as of the date of the balance sheet and revenue and expenses for the period. Actual results
could differ from those estimates. Material estimates that are particularly susceptible to significant change
in the near term relate to the fair value of acquired assets, the allowance for loan losses, stock-based
compensation and derivative instrument valuation.
Segments
The Company has one reportable segment. All of the Company’s activities are interrelated, and each
activity is dependent and assessed based on how each of the activities of the Company supports the others.
For example, lending is dependent upon the ability of the Company to fund itself with deposits and
borrowings while managing the interest rate and credit risk. Accordingly, all significant operating decisions
are based upon analysis of the Bank as one segment or unit.
Basis of consolidated financial statement presentation
The consolidated financial statements as of December 31, 2014 and 2013 and for the years ending
December 31, 2014, 2013 and 2012 have been prepared in accordance with GAAP and general practices
within the banking industry. Such policies have been followed on a consistent basis.
Management has evaluated subsequent events for potential recognition or disclosure in the
the date upon which the Company’s
consolidated financial statements through March 13, 2015,
consolidated financial statements were available to be issued. No subsequent events were identified that
would have required a change to the consolidated financial statements or disclosure in the notes to the
consolidated financial statements.
82
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
Cash and Cash Equivalents and Statement of Cash Flows
Cash and due from banks and federal funds sold are recognized as cash equivalents in the consolidated
statements of cash flows. Federal funds sold generally mature in one day. For purposes of reporting cash
flows, all highly liquid debt instruments purchased with an original maturity of three months or less are
considered to be cash equivalents. Cash flows from loans and deposits are reported net. The balances of
cash and due from banks and federal funds sold, at times, may exceed federally insured limits. The
Company has not experienced any losses from such concentrations.
Investment Securities
Management determines the appropriate classifications of investment securities at the date individual
investment securities are acquired, and the appropriateness of such classifications is reaffirmed at each
balance sheet date. The Company’s investment securities are categorized as either available for sale or held
to maturity. Held to maturity investments are carried at amortized cost; available for sale securities are
carried at fair value, with unrealized gains and losses excluded from earnings and reported in other
comprehensive income (loss) as a separate component of capital, net of estimated income taxes.
Fair value of investment securities is determined by applying the valuation framework in accordance
with GAAP, which specifies a hierarchy of valuation techniques based on whether the inputs to those
techniques are observable or unobservable. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect the Company’s market assumptions.
Investment securities are reviewed regularly for other-than-temporary impairment. For debt securities,
other-than-temporary impairment is deemed to exist if the present value of the expected future cash flows is
less than the amortized cost basis of the security. The credit loss component of an other-than-temporary
impairment write-down is recorded in earnings, while the remaining portion of the impairment loss is
recognized in other comprehensive income (loss), provided the Company does not intend to sell the
underlying debt security and it is more likely than not that the Company will not be required to sell the debt
security prior to recovery.
In determining whether a credit loss exists and the period over which the fair value of the debt security
is expected to recover, management considers the following factors: the length of time and extent that fair
value has been less than cost, the financial condition and near term prospects of the issuer, any external
credit ratings, the level of excess cash flows generated from the underlying collateral supporting the
principal and interest payments of the debt securities, the level of credit enhancement provided by the
structure and the Company’s ability and intent to hold the security for a period sufficient to allow for any
anticipated recovery in fair value.
The sale of a held to maturity security within three months of its maturity date or after collection of at
least 85% of the principal outstanding at the time the security was acquired is considered a maturity for
purposes of classification and disclosure.
Purchase premiums and discounts are recognized in interest income using the interest method over the
terms of the securities. Gains or losses on the sales of securities are recognized at trade date utilizing the
specific identification method.
Bank Owned Life Insurance
The investment in bank owned life insurance (“BOLI”) represents the cash surrender value of life
insurance policies on the lives of certain Bank employees who have provided positive consent allowing the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Bank to be the beneficiary of such policies. Increases in the cash value of the policies, as well as insurance
proceeds received, are recorded in noninterest income, and are not subject to income taxes. The financial
strength of the insurance carrier is reviewed prior to the purchase of BOLI and annually thereafter.
Federal Home Loan Bank Stock
Federal Home Loan Bank of Boston (“FHLB”) stock is a non-marketable equity security that is
carried at cost.
Loans Held For Sale
Loans held for sale are those loans which management has the intent to sell in the foreseeable future,
and are carried at the lower of aggregate cost or market value. Net unrealized losses, if any, are recognized
by a valuation allowance through a charge to noninterest income. Realized gains and losses on the sale of
loans are recognized on the settlement date and are determined by the difference between the sale proceeds
and the carrying value of the loans.
Loans may be sold with servicing rights released or retained. At the time of the sale, management
determines the value of any retained servicing rights, which represents the present value of the differential
between the contractual servicing fee and adequate compensation, defined as the fee a sub-servicer would
require to assume the role of servicer, after considering the estimated effects of prepayments. If material, a
portion of the gain on the sale of the loan is recognized as due to the value of the servicing rights, and a
servicing asset is recorded.
Loans Receivable
Loans receivable that management has the ability and intent to hold for the foreseeable future or until
maturity or payoff are stated at their current unpaid principal balances, net of the allowance for loan losses,
net deferred loan origination fees and unamortized loan premiums.
A loan is considered impaired when it is probable that all contractual principal or interest payments
due will not be collected in accordance with the terms of the loan agreement. Impaired loans are measured
based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as
a practical expedient, at the loan’s observable market price or the fair value of the collateral, if the loan is
collateral dependent. The amount of impairment, if any, and any subsequent changes are recorded as
adjustments to the allowance for loan losses.
Management reviews all nonaccrual loans, other loans past due 90 days or more, and restructured
loans for impairment. In most cases, loan payments that are past due less than 90 days are considered
minor collection delays and the related loans are not considered to be impaired. Consumer installment
loans are considered to be pools of small balance homogeneous loans, which are collectively evaluated for
impairment.
Modifications to a loan are considered to be a troubled debt restructuring (“TDR”) when two
conditions are met: 1) the borrower is experiencing financial difficulties and 2) the modification constitutes
a concession. Modified terms are dependent upon the financial position and needs of the individual
borrower. Debt may be bifurcated with separate terms for each tranche of the restructured debt. The
decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit the
Company by increasing the ultimate probability of collection.
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. Initially, all TDRs are
reported as impaired. Nonaccrual classification may be removed if the borrower demonstrates compliance
with the modified terms for a minimum of six months. TDR’s are reported as such for at least one year
from the date of restructuring. In years after the restructuring, troubled debt restructured loans are
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
removed from this classification if the restructuring agreement specifies a market rate of interest equal to
that which would be provided to a borrower with similar credit at the time of restructuring and the loan is
not deemed to be impaired based on the modified terms.
Acquired Loans
Loans that the Company acquires in acquisitions are initially recorded at fair value with no carryover
of the related allowance for credit losses. Determining the fair value of the loans involves estimating the
amount and timing of principal and interest cash flows initially expected to be collected on the loans and
discounting those cash flows at an appropriate market rate of interest.
For loans which meet the criteria stipulated in Accounting Standards Codification (“ASC”) 310-30,
“Loans and Debt Securities Acquired with Deteriorated Credit Quality”, the Company recognizes an
accretable yield, which is defined as the excess of all cash flows expected at acquisition over the initial fair
value of the loan, as interest income on a level-yield basis over the expected remaining life of the loan. The
excess of the loan’s contractually required payments over the cash flows expected to be collected is the
nonaccretable difference. The nonaccretable difference is not recognized as an adjustment of yield, a loss
accrual, or a valuation allowance. After the initial acquisition, the Company continues to evaluate whether
the timing and the amount of cash to be collected are reasonably estimated. Subsequent significant
increases in cash flows the Company expects to collect will first reduce previously recognized valuation
allowance and then be reflected prospectively as an increase to the level yield. Subsequent decreases in
expected cash flows may result in the loan being considered impaired. Interest income is not recognized to
the extent that the net investment in the loan would increase to an amount greater than the estimated payoff
amount.
For ASC 310-30 loans, the expected cash flows reflect anticipated prepayments, determined on a loan
by loan basis, according to the anticipated collection plan of these loans. Prepayments result in the
recognition of the nonaccretable balance as current period yield. Changes in prepayment assumptions may
change the amount of interest income and principal expected to be collected. The expected prepayments
used to determine the accretable yield are consistent between the cash flows expected to be collected and
projections of contractual cash flows so as to not affect the nonaccretable difference.
For loans that do not meet the ASC 310-30 criteria, the Company records interest income on a level
yield basis using the contractually required cash flows. The Company subjects loans that do not meet the
ASC 310-30 criteria to ASC Topic 450, “Contingencies”, by collectively evaluating these loans for an
allowance for loan loss, using the same methodology as loans originated by the Company.
Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition are considered
performing upon acquisition, regardless of whether the customer is contractually delinquent,
if the
Company can reasonably estimate the timing and amount of the expected cash flows on such loans and if
the Company expects to fully collect the new carrying value of the loans. As such, the Company may no
longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans,
including the impact of any accretable yield. The Company has determined that it can reasonably estimate
future cash flows on the Company’s current portfolio of acquired loans that are past due 90 days or more,
and on which the Company is accruing interest and the Company expects to fully collect the carrying value
of the loans.
Allowance For Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a
provision for loan losses charged to earnings. Loan losses are charged against the allowance for loan losses
when management believes the non-collectability of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance for loan losses.
The allowance for loan losses is evaluated on a regular basis by management and is based upon
management’s periodic review of the collectability of the loans in light of historical experience, the nature
and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
estimated value of any underlying collateral and prevailing economic conditions. This evaluation is
inherently subjective, as it requires estimates that are susceptible to significant revision as more information
becomes available.
The allowance for loan losses consists of specific and general components. The specific component
relates to impaired loans that are classified as doubtful, substandard or special mention. For these loans, an
allowance is established when the discounted cash flows, collateral value or observable market price of the
impaired loan is lower than the carrying value of that loan. The general component covers non-classified
loans and is based on historical loss experience adjusted for qualitative factors, and includes unallocated
components maintained to cover uncertainties that could affect management’s estimation of probable
losses, and reflects the margin of
imprecision inherent in the underlying assumptions used in the
methodologies for estimating specific and general losses in the portfolio.
Management believes the allowance for loan losses is adequate. While management uses available
information to recognize losses on loans, future additions to the allowance may be necessary based on
changes in economic conditions. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowance for loan losses. Such agencies have the authority to
require additions to the allowance or charge-offs based on the agencies’ judgments about information
available to them at the time of their examination.
Goodwill and Intangibles
Goodwill and identifiable intangible assets are evaluated for impairment annually or whenever events
or changes in circumstances indicate the carrying value of these assets may not be recoverable. When these
assets are evaluated for impairment, if the carrying amount exceeds fair value, an impairment charge is
recorded to income. The fair value is based on observable market prices, when practicable. Other valuation
techniques may be used when market prices are unavailable, including estimated discounted cash flows. This
type of analysis contains uncertainties because it requires management to make assumptions and to apply
judgment to estimate industry economic factors and the profitability of future business strategies. In the
event of future changes in fair value, the Company may be exposed to an impairment charge that could be
material.
Interest and Fees on Loans
Interest on loans is accrued and included in income based on contractual rates applied to principal
amounts outstanding. Accrual of interest is discontinued when loan payments are 90 days or more past due,
based on contractual terms, or when, in the judgment of management, collectability of the loan or loan
interest becomes uncertain. When interest accrual is discontinued, all unpaid accrued interest is reversed
against interest income. Subsequent recognition of income occurs only to the extent payment is received
subject to management’s assessment of the collectability of the remaining interest and principal. 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.
Loan origination fees, net of direct loan origination costs, are deferred and amortized as an adjustment
to the loan’s yield generally over the contractual life of the loan, utilizing the interest method.
Foreclosed Real Estate
Assets acquired through deed in lieu or loan foreclosure are initially recorded at fair value less costs to
sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of
cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation
allowance is recorded through expense. Operating costs after acquisition are expensed.
Premises and Equipment
Premises and equipment are stated at cost, net of accumulated depreciation and amortization.
Leasehold improvements are capitalized and amortized over the shorter of the terms of the related leases or
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BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the estimated economic lives of the improvements. Depreciation and amortization is charged to operations
using the straight-line method over the estimated useful lives of the related assets which range from 3 to 39
years. Gains and losses on dispositions are recognized upon realization. Maintenance and repairs are
expensed as incurred and improvements are capitalized.
Income Taxes
The Company accounts for certain income and expense items differently for financial reporting
purposes than for income tax purposes. Provisions for deferred taxes are being made in recognition of these
temporary differences. The Company examines its financial statements, income tax provision and federal
and state income tax returns and analyzes its tax positions, including permanent and temporary differences,
as well as the major components of income and expense to determine whether a tax benefit is more likely
than not to be sustained upon examination by tax authorities. It is the Company’s policy to recognize
interest and penalties related to unrecognized tax liabilities within income tax expense in the consolidated
statements of income.
Related Party Transactions
The Company’s Directors, Officers and their affiliates have been customers of and have had
transactions with the Bank, and it is expected that such persons will continue to have such transactions in
the future. Management believes that all deposits accounts, loans, services and commitments comprising
such transactions were made in the ordinary course of business, and on substantially the same terms,
including interest rates, as those prevailing at the time for comparable transactions with other customers
who are not Directors or Officers.
Stock Compensation
Stock-based compensation expense is measured as of the grant date, based on the fair value of the
award, and is recognized as an expense over the requisite service period.
Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing income available to common shareholders by
the weighted-average number of shares of common stock outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to issue common stock (such as stock
options) were exercised or converted into common stock or resulted in the issuance of common stock that
then shared in earnings. Unvested share-based payment awards, which include the right to receive
non-forfeitable dividends, are considered to participate with common stock in undistributed earnings for
purposes of computing EPS.
The Company’s unvested restricted stock awards are participating securities, and therefore, are
included in the computation of both basic and diluted earnings per common share. EPS is calculated using
the two-class method, under which calculations (1) exclude from the numerator any dividends paid or owed
on participating securities and any undistributed earnings considered to be attributable to participating
securities and (2) exclude from the denominator the dilutive impact of the participating securities.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included
in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on
available for sale securities, are reported as a separate component of the stockholders’ equity section of the
balance sheets, such items, along with net income, are components of comprehensive income.
Fair Values of Financial Instruments
The following methods and assumptions were used by management in estimating the fair value of its
financial instruments:
Cash and due from banks, federal funds sold, accrued interest receivable and mortgagors’ escrow
accounts: The carrying amount is a reasonable estimate of fair value.
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BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Investment securities: Fair values are based on quoted market prices or dealer quotes, if available. If a
quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
The fair value of securities is further classified in accordance with the framework specified in GAAP as
discussed in Note 19, Fair Value Measurements.
FHLB stock: The carrying value of FHLB stock approximates fair value based on the most recent
redemption provisions of the FHLB.
Loans held for sale: The fair value is based upon prevailing market prices.
Loans receivable: For variable rate loans which reprice frequently and have no significant change in
credit risk, fair values are based on carrying values. The fair value of fixed rate loans are estimated by
discounting the future cash flows using the year end rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
Derivative asset (liability): The valuation of the Company’s interest rate swap is obtained from a
third-party pricing service and is determined using a discounted cash flow analysis on the expected cash
flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the
derivatives, including the period to maturity and interest rate curves.
Deposits: The fair value of demand deposits, regular savings and certain money market deposits is
the amount payable on demand at the reporting date. The fair value of certificates of deposit and other time
deposits is estimated using a discounted cash flow calculation that applies interest rates currently being
offered for deposits of similar remaining maturities to a schedule of aggregated expected maturities on such
deposits.
Advances from the FHLB: The fair value of the advances is estimated using a discounted cash flow
calculation that applies current FHLB interest rates for advances of similar maturity to a schedule of
maturities of such advances.
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.
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BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recent accounting pronouncements
The following section includes changes in accounting principles and potential effects of new
accounting guidance and pronouncements.
ASU No. 2014-01 — Investments — Equity Method and Joint Ventures (Topic 323) — “Accounting for
Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task
Force)”. The ASU permits an entity to make an accounting policy election to account for its investment
in qualified affordable housing projects using the proportional amortization method if certain conditions
are met. Under the proportionate amortization method, an entity amortizes the initial cost of
the
investment in proportion to the tax credits and other tax benefits received and recognizes the net investment
performance in the income statement as a component of income tax expense (benefit). The decision to
apply the proportionate amortization method of accounting should be applied consistently to all qualifying
affordable housing project investments. A reporting entity that uses the effective yield or other method to
account for its investments in qualified affordable housing projects before the date of adoption may
continue to apply such method to those preexisting investments. The amendments are effective for annual
and interim periods beginning after January 1, 2015. The Company does not expect the application of this
guidance to have a material impact on the Company’s financial statements.
ASU No. 2014-04, Receivables — Troubled Debt Restructurings by Creditors (Subtopic 310-40) —
“Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a
consensus of the FASB Emerging Issues Task Force)”. The ASU clarifies that an in substance repossession
or foreclosure occurs, and a creditor is considered to have received physical possession of residential real
estate property collateralizing a consumer mortgage loan, upon either (i) the creditor obtaining legal title to
the residential real estate property upon completion of a foreclosure or (ii) the borrower conveying all
interest in the residential real estate property to the creditor to satisfy that loan through completion of a
deed in lieu of foreclosure or through a similar agreement. In addition, the amendments require disclosure
of both the amount of foreclosed residential real estate property held by the creditor and the recorded
investment in consumer mortgage loans collateralized by residential real estate property that are in the
process of foreclosure in accordance with local requirements of the applicable jurisdiction. An entity can
elect to adopt the amendments using either a modified retrospective method or a prospective transition
method. The amendments are effective for annual and interim periods beginning after January 1, 2015. The
Company does not expect the application of this guidance to have a material impact on the Company’s
financial statements.
(ii)
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;
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. The amendments are
effective for annual and interim periods beginning after January 1, 2017. 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
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BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
period as a performance condition. For awards within the scope of this Update, the Task Force decided that
an entity should apply existing guidance in Topic 718 as it relates to share-based payments with
performance conditions that affect vesting. Consistent with that guidance, performance conditions that
affect vesting should not be reflected in estimating the fair value of an award at the grant date.
Compensation cost should be recognized when it is probable that the performance target will be achieved
and should represent the compensation cost attributable to the period for which the requisite service has
already been rendered. If the performance target becomes probable of being achieved before the end of the
requisite service period, the remaining unrecognized compensation cost should be recognized prospectively
over the remaining requisite service period. The total amount of compensation cost recognized during and
after the requisite service period should reflect the number of awards that are expected to vest and should
be adjusted to reflect those awards that ultimately vest. The amendments are effective for annual and
interim periods beginning after January 1, 2016. The Company does not expect the application of this
guidance to have a material impact on the Company’s financial statements.
ASU No. 2014-14, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40) —
“Classification of Certain Government-Guaranteed Residential Mortgage Loans upon Foreclosure (a
consensus of the FASB Emerging Issues Task Force)”. The ASU has been issued to reduce diversity in
practice in the classification of foreclosed residential mortgage loans held by creditors that are fully
guaranteed under certain government programs, including the Federal Housing Administration guarantees.
A residential mortgage loan would be derecognized and a separate other receivable would be recognized
upon foreclosure if the loan has both of the following characteristics: (i) the loan has a government
guarantee that is not separable from the loan before foreclosure entitling the creditor to the full unpaid
principal balance of the loan; and (ii) at the time of foreclosure, the creditor has the intent to make a claim
on the guarantee and the ability to recover the full unpaid principal balance of the loan through the
guarantee. Notably, upon foreclosure, the separate other receivable would be measured based on the current
amount of the loan balance expected to be recovered under the guarantee. The amendments are effective for
annual and interim periods beginning after January 1, 2015. The Company does not expect the application
of this guidance to have a material impact on the Company’s financial statements.
ASU No. 2014-17, Business Combinations (Topic 805) — “Pushdown Accounting (a consensus of the
FASB Emerging Issues Task Force)”. Current generally accepted accounting principles (GAAP) offer
limited guidance for determining whether and at what threshold an acquiree (acquired entity) can reflect the
acquirer’s accounting and reporting basis (pushdown accounting) in its separate financial statements. The
objective of this ASU is to provide guidance on whether and at what threshold an acquired entity that is a
business or nonprofit activity can apply pushdown accounting in its separate financial statements. The
amendments in this Update provide an acquired entity with an option to apply pushdown accounting in its
separate financial statements upon occurrence of an event in which an acquirer obtains control of the
acquired entity. The amendments in this ASU were effective on November 18, 2014. After the effective date,
an acquired entity can make an election to apply the guidance to future change-in-control events or to its
most recent change-in-control event. This ASU did not impact the Company’s financial statements and the
Company does not expect the application of this guidance will have a material impact on the Company’s
financial statements in the future.
ASU No. 2015-01, Income Statement Extraordinary and Unusual Items (Subtopic 225-20) —
“Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items”. Under
the existing guidance, an entity is required to separately disclose extraordinary items, net of tax, in the
income statement after income from continuing operations if an event or transaction is of an unusual
nature and occurs infrequently. Under this ASU, separate, net-of-tax presentation (and corresponding
earnings per share impact) will no longer be allowed. The existing requirement to separately present items
that are of an unusual nature or occur infrequently on a pre-tax basis within income from continuing
operations has been retained. The new guidance also requires similar separate presentation of items that are
both unusual and infrequent. The standard is effective for both public and private companies for periods
beginning after December 15, 2015. Early adoption is permitted, but only as of the beginning of the fiscal
year of adoption. Upon adoption, a reporting entity may elect prospective or retrospective application. If
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BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
adopted prospectively, both the nature and amount of any subsequent adjustments to previously reported
extraordinary items must be disclosed. The Company does not expect the application of this guidance will
have a material impact on the Company’s financial statements.
2.
Shareholders’ Equity
Preferred stock
In 2011, the Company elected to participate in Treasury’s Small Business Lending Fund Program
(“SBLF”). The SBLF is a $30 billion fund established under the Small Business Jobs Act of 2010 to
encourage lending to small businesses by providing Tier 1 capital to qualified community banks with assets
of less than $10 billion. The SBLF is intended to expend the ability to lend to small businesses, in order to
help stimulate the economy and promote job growth.
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 pays noncumulative dividends. The Company has paid dividends at a rate
of 1.0% since issuance. For the eleventh quarterly dividend payment through four and one-half years after
its issuance, the dividend rate on the Series C Preferred Stock will be fixed at the rate in effect at the end of
the ninth quarterly dividend period. In the second quarter of 2016, four and one-half years from its
issuance, the dividend rate will be fixed at 9.0% per annum.
The Series C Preferred Stock has no maturity date and ranks senior to the Company’s common stock
with respect to the payment of dividends and distributions and amounts payable upon liquidation,
dissolution and winding up of the Company. The Series C Preferred Stock is non-voting, other than voting
rights on matters that could adversely affect the Series C Preferred Stock, and is redeemable at any time by
the Company, subject to the approval of its federal banking regulator. The redemption price is the aggregate
liquidation preference of the SBLF Preferred Stock plus accrued but unpaid dividends and pro rata portion
of any lending incentive fee. All redemptions must be in an amount at least equal to 25% of the number of
originally issued shares of SBLF Preferred Stock, or 100% of the then-outstanding shares if less than 25%
of the number of shares originally issued.
Common stock
On March 23, 2007, the Company completed a secondary offering, begun in October 2006, and raised
a total of $15.5 million ($15.4 million, net of expenses). The purpose of the offering was to capitalize the
Company and through it, capitalize TBF during its de novo period, and allow for the continued growth of
BNC.
On July 10, 2007, the Company began a Private Placement for the sale of Units similar to those offered
in the secondary offering. The purpose of the Private Placement was to attract investors from the Town of
Fairfield who would be willing to support TBF during its de novo period. The Private Placement raised a
total of $1.7 million ($1.6 million, net of expenses). The net proceeds of these funds were added to the
Company’s capital in the first quarter of 2008.
For both the 2006 Secondary Offering and the 2007 Private Placement, the Company issued 945,789
units and received $17.2 million in total capital ($17.1 million, net of expenses).
On December 20, 2010, the Company completed a Private Placement for the sale of its common stock.
The purpose of the offering was to raise additional capital for future growth. The Company issued 300,321
shares and received $4.2 million in total capital ($4.16 million, net of expenses).
On September 30, 2013, the Company completed a Private Placement for the sale of its common stock,
which began in the fourth quarter of 2012, for the purpose of raising additional capital for future growth.
On January 11, 2013, the Company issued 527,513 shares and received $7.3 million in total capital ($7.3
91
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
million, net of expenses) and on September 30, 2013, the Company issued 370,000 shares and received $6.2
million in total capital ($5.9 million, net of expenses).
Regarding the September 30, 2013 issuance of 370,000 shares, the purchaser executed an agreement
that, among other things, provides it with “pre-emptive” rights for a period of three years. This entitles the
investor to be afforded the opportunity to acquire from the Company, for the same price and on the same
terms as such Company securities are offered, in the aggregate up to the amount of such securities required
to enable the investor group to maintain its ownership percentage of Company stock (measured
immediately prior to such offering).
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.
On October 1, 2014, the Company acquired all of the outstanding common shares of Quinnipiac Bank
& Trust Company (“Quinnipiac”). Quinnipiac shareholders received 510,122 shares of the Company
common stock and $3.6 million in cash.
Dividends
The Company’s shareholders are entitled to dividends when and if declared by the board of directors,
out of funds legally available. The ability of the Company to pay dividends depends, in part, on the ability
of the Bank to pay dividends to the Company. In accordance with Connecticut statutes, regulatory approval
is required to pay dividends in excess of the Bank’s profits retained in the current year plus retained profits
from the previous two years. The Bank is also prohibited from paying dividends that would reduce its
capital ratios below minimum regulatory requirements.
The payment of dividends is subject to additional restrictions in connection with the SBLF preferred
stock.
For the years ended December 31, 2014, 2013 and 2012, the Company paid cash dividends on
preferred stock of $110 thousand, $111 thousand, and $132 thousand, respectively. For the years ended
December 31, 2014, 2013 and 2012, the Company did not declare or pay dividends on its common stock.
The Company did not repurchase any of its common stock during 2014, 2013 or 2012.
Warrants
BNC’s October 26, 2006 Stock Offering and the July 10, 2007 Private Placement (the “Offerings”) call
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 1, 2015 through
December 1, 2015. Each warrant allows a holder to purchase .3221 shares of common stock at an exercise
price of $14.00 per share. None of the warrants have been exercised as of December 31, 2014. Assuming
that all of the warrants issued are exercised in full during the exercise period, the Company would receive
$4,264,941 in gross capital and issue 304,640 shares of common stock.
As a result of the acquisition of Quinnipiac on October 1, 2014 the Company issued 68,600 warrants
to former Quinnipiac warrant holders in accordance with the merger agreement. Each warrant was
automatically converted into a warrant to purchase 0.56 shares of the Company’s common stock for an
exercise price of $17.56. None of the warrants have been exercised as of December 31, 2014.
3. Restrictions on cash and due from banks
The Bank is required to maintain $125 thousand in the Federal Reserve Bank for clearing purposes.
92
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Mergers and acquisitions
On November 5, 2013, the Company acquired all of the outstanding common shares of Wilton. This
business combination expanded the Bank’s presence in Fairfield County and enhanced opportunities for
businesses, customer relationships, employees and the communities served by the Bank.
On the acquisition date, Wilton had 372,985 outstanding common shares, net of 108,260 shares of
treasury stock, and shareholders’ equity of $6.3 million. Wilton shareholders received $13.50 per share in
cash resulting in a consideration value of $5.0 million.
The assets and liabilities in the Wilton acquisition were recorded at their fair value based on
management’s best estimate using information available at the date of acquisition. Consideration paid and
fair values of Wilton’s assets acquired and liabilities assumed are summarized in the following tables:
Consideration paid:
Cash consideration paid to Wilton shareholders . . . . . . . . . . . . . . . . . . . . . . .
$5,035
Amount
(In thousands)
Recognized amounts of identifiable assets acquired
and (liabilities) assumed:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Held to maturity investments securities . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . .
Core deposit intangibles . . . . . . . . . . . . . . . . . . .
Deferred tax assets, net . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities
Total identifiable net assets . . . . . . . . . . . . . . . .
Gain on purchase . . . . . . . . . . . . . . . . . . . .
Explanation of fair value adjustments:
As Acquired
Fair Value
Adjustments
(In thousands)
As Recorded
at Acquisition
$ 35,919
1,022
27,097
4,303
1,895
—
—
587
(64,145)
(336)
$ 6,342
$ —
—
(2,008)(a)
—
(450)(b)
499(c)
1,997(d)
—
(12)(e)
—
26
$
$ 35,919
1,022
25,089
4,303
1,445
499
1,997
587
(64,157)
(336)
6,368
$ (1,333)
(a) The adjustment represents the write down of the book value of loans to their estimated fair value
based on current interest rates and expected cash flows, which includes an estimate of expected
loan loss inherent in the portfolio.
(b) The adjustment represents the write down of the book value of foreclosed real estate to their
estimated fair value based on current appraisals.
(c) Represents the economic value of the acquired core deposit base (total deposits less jumbo time
deposits). The core deposit intangible will be amortized over an estimated life of 9.3 years based
on the double declining balance method of amortization.
(d) Represents net deferred tax assets resulting from the fair value adjustments related to the acquired
assets and liabilities, identifiable intangibles and other purchase accounting adjustments.
(e) The adjustment represents the fair value of time deposits, which were valued at a premium of
0.11% as they bore slightly higher rates than the prevailing market.
93
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Except for collateral dependent loans with deteriorated credit quality, the fair values for loans acquired
from Wilton were estimated using cash flow projections based on the remaining maturity and repricing
terms. Cash flows were adjusted by estimating future credit losses and the rate of prepayments. Projected
monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar
loans. For collateral dependent loans with deteriorated credit quality, to estimate the fair value, the
Company analyzed the value of the underlying collateral of the loans, assuming the fair values of the loans
were derived from the eventual sale of the collateral. Those values were discounted using market derived
rates of return, with consideration given to the period of time and costs associated with the foreclosure and
disposition of the collateral. There was no carryover of Wilton’s allowance for credit losses associated with
the loans that were acquired as the loans were initially recorded at fair value.
Information about the acquired loan portfolio subject to purchased credit impaired accounting
guidance (ASC 310-30) as of November 5, 2013 was as follows:
Contractually required principal and interest at acquisition . . . . . . . . . . . . . . . . .
Contractual cash flows not expected to be collected (nonaccretable discount) . . . .
Expected cash flows at acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest component of expected cash flows (accretable discount) . . . . . . . . . . . . .
November 5,
2013
(In thousands)
$14,528
(1,412)
13,116
(1,513)
Fair value of acquired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,603
On October 1, 2014, the Company acquired all of the outstanding common shares of Quinnipiac Bank
& Trust Company (“Quinnipiac”). Quinnipiac had two banking offices primarily serving south-central
Connecticut and has merged with and into Bankwell Bank.
Quinnipiac shareholders received 510,122 shares of the Company common stock and $3.6 million in
cash. As of September 30, 2014, Quinnipiac had assets with a carrying value of approximately $117.8
million, including loans outstanding with a carrying value of approximately $97.1 million, as well as
deposits with a carrying value of approximately $100.4 million and a book value of $10.1 million. The
results of Quinnipiac’s operations are included in the Company’s Consolidated Statement of Income from
the date of acquisition.
Consideration paid:
Cash consideration paid to Quinnipiac shareholders . . . . . . . . . . . . . . . . . . . .
Equity consideration paid to Quinnipiac shareholders
. . . . . . . . . . . . . . . . . .
Total Consideration paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,648
9,676
13,324
Amount
(In thousands)
94
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recognized amounts of identifiable assets acquired
and (liabilities) assumed:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available for sale investments securities . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . .
Core deposit intangibles . . . . . . . . . . . . . . . . . . .
Deferred tax assets, net . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities
Total identifiable net assets . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . .
As Acquired
Fair Value
Adjustments
(In thousands)
As Recorded
at Acquisition
$
6,195
8,533
97,103
4,046
129
—
1,070
756
(100,391)
(7,000)
(315)
$ 10,126
$ —
(29)(a)
748(b)
—
—
530(c)
(388)(d)
—
(252)(e)
—
—
$ 609
$
6,195
8,504
97,851
4,046
129
530
682
756
(100,643)
(7,000)
(315)
10,735
$
2,589
Explanation of fair value adjustments:
(a) The adjustment represents the mark to market adjustment on available for sale investment
securities.
(b) The adjustment represents the adjustment of the book value of loans to their estimated fair value
based on current interest rates and expected cash flows, which includes an estimate of expected
loan loss inherent in the portfolio.
(c) Represents the economic value of the acquired core deposit base (total deposits less jumbo time
deposits). The core deposit intangible will be amortized over an estimated life of 8.8 years based
on the double declining balance method of amortization.
(d) Represents net deferred tax assets resulting from the fair value adjustments related to the acquired
assets and liabilities, identifiable intangibles and other purchase accounting adjustments.
(e) The adjustment represents the fair value of time deposits, which were valued at a premium of
0.57% as they bore somewhat higher rates than the prevailing market.
Except for collateral dependent loans with deteriorated credit quality, the fair values for loans acquired
from Quinnipiac were estimated using cash flow projections based on the remaining maturity and repricing
terms. Cash flows were adjusted by estimating future credit losses and the rate of prepayments. Projected
monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar
loans. For collateral dependent loans with deteriorated credit quality, to estimate the fair value, the
Company analyzed the value of the underlying collateral of the loans, assuming the fair values of the loans
were derived from the eventual sale of the collateral. Those values were discounted using market derived
rates of return, with consideration given to the period of time and costs associated with the foreclosure and
disposition of the collateral. There was no carryover of the Quinnipiacs allowance for credit losses
associated with the loans that were acquired as the loans were initially recorded at fair value.
95
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information about the acquired loan portfolio subject to purchased credit impaired accounting
guidance (ASC 310-30) as of October 1, 2014 was as follows:
Contractually required principal and interest at acquisition . . . . . . . . . . . . . . . . .
Contractual cash flows not expected to be collected (nonaccretable discount) . . . .
Expected cash flows at acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest component of expected cash flows (accretable discount) . . . . . . . . . . . . .
Fair value of acquired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
October 1,
2014
(In thousands)
$1,729
(6)
1,723
(478)
$1,245
5. Goodwill and Other Intangible Assets
As discussed in Note 4, Mergers and Acquisitions, the Company completed its acquisition of the
Wilton Bank during the fourth quarter of 2013 and Quinnipiac Bank and Trust Company during the fourth
quarter of 2014. In accordance with applicable accounting guidance, the amount paid is allocated to the
fair value of the net assets acquired, with any excess amounts recorded as goodwill. If the fair value of the
net assets is greater than the amount paid, the excess amount is recorded to noninterest income as a gain on
the purchase.
The Company recorded a gain of $1.3 million in conjunction with the Wilton acquisition, the amount
that the net assets exceeded the amount paid. Therefore, there is no goodwill as a result of this acquisition.
An other intangible asset of $499 thousand was recorded, representing the economic value of the acquired
core deposit base.
At December 31, 2014, the Company had recorded $2.6 million of goodwill as a result of the
Quinnipiac acquisition. An other intangible asset of $530 thousand was recorded, representing the
economic value of the acquired core deposit base.
The increase in goodwill in 2014 is as follows:
Balance, beginning of the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill acquired:
Year Ended
December 31, 2014
(In thousands)
$ —
Quinnipiac Bank and Trust Company . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, end of the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,589
$2,589
The Company tests goodwill annually in the fourth quarter. No impairment was recorded on goodwill
for 2014.
The table below provided information regarding the carrying amounts and accumulated amortization
of amortized intangible assets as of the dates set forth below.
Gross
Intangible
Asset
Accumulated
Amortization
(In thousands)
Net
Intangible
Asset
December 31, 2014
Core deposit intangible . . . . . . . . . . . . . . . . . . . . .
$1,029
$181
$848
December 31, 2013
Core deposit intangible . . . . . . . . . . . . . . . . . . . . .
$ 499
$ 18
$481
96
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6.
Investment Securities
The amortized cost, gross unrealized gains and losses and fair values of available for sale and held to
maturity securities at December 31, 2014 were as follows:
Amortized
Cost
December 31, 2014
Gross Unrealized
Gains
Losses
(In thousands)
Fair
Value
Available for sale securities:
U.S. Government and agency obligations
Due in less than one year . . . . . . . . . . . . . . . . . . . . . . .
$
497
$
Due from one through five years . . . . . . . . . . . . . . . . . .
3,998
Due from five through ten years . . . . . . . . . . . . . . . . . .
17,055
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State agency and municipal obligations
Due from five through ten years . . . . . . . . . . . . . . . . . .
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds
Due in less than one year . . . . . . . . . . . . . . . . . . . . . . .
Due from one through five years . . . . . . . . . . . . . . . . . .
Due from five through ten years . . . . . . . . . . . . . . . . . .
Government-sponsored mortgage backed securities
Due from one through five years . . . . . . . . . . . . . . . . . .
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,004
24,554
9,297
8,500
17,797
5,764
4,150
6,121
16,035
99
5,468
5,567
9
—
27
4
40
295
544
839
44
268
8
320
1
131
132
$ —
$
506
(69)
(79)
(28)
(176)
(48)
(4)
(52)
(6)
—
(24)
(30)
—
(17)
(17)
3,929
17,003
2,980
24,418
9,544
9,040
18,584
5,802
4,418
6,105
16,325
100
5,582
5,682
Total available for sale securities . . . . . . . . . . . . . . . . . . .
$63,953
$1,331
$(275)
$65,009
Held to maturity securities:
U.S. Government and agency obligations
Due in less than one year . . . . . . . . . . . . . . . . . . . . . . .
$ 1,010
$ —
$ —
$ 1,010
State agency and municipal obligations
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,179
Corporate bonds
Due from five through ten years . . . . . . . . . . . . . . . . . .
1,000
Government-sponsored mortgage backed securities
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . .
265
Total held to maturity securities . . . . . . . . . . . . . . . . .
$11,454
$
—
—
31
31
—
9,179
(15)
—
985
296
$ (15)
$11,470
97
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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:
Amortized
Cost
December 31, 2013
Gross Unrealized
Gains
Losses
(In thousands)
Fair
Value
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 . . . . . . . . . . . . . . . . . .
State agency and municipal obligations
Due from five through ten years . . . . . . . . . . . . . . . . . .
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,997
5,997
3,125
8,480
11,605
—
—
152
375
527
(292)
(309)
4,705
5,688
—
—
—
3,277
8,855
12,132
Corporate bonds
Due from one through five years . . . . . . . . . . . . . . . . . .
9,166
411
(11)
9,566
Government-sponsored mortgage backed securities
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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
Corporate bonds
Due from five through ten years . . . . . . . . . . . . . . . . . .
1,000
Government-sponsored mortgage backed securities
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . .
334
Total held to maturity securities . . . . . . . . . . . . . . . . .
$13,816
$
—
—
28
28
—
11,461
(27)
—
973
362
$ (29)
$13,815
There were no sales of, or realized gains or losses on, investment securities for the year ended
December 31, 2014. For the years ended December 31, 2013 and 2012, the Company realized gross gains of
$648 thousand and $76 thousand from the sales of investment securities, respectively. For the years ended
December 31, 2013 and 2012, gross losses on the sale of investment securities were $0 and $95 thousand,
respectively. These amounts were reclassified out of accumulated other comprehensive income and included
in net income under the line item “net gain (loss) on sale of available for sale securities” in noninterest
income.
At December 31, 2014 and 2013, securities with approximate fair values of $5.9 million and $6.2
million, respectively, were pledged as collateral for public deposits.
98
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 December 31, 2014 and 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)
December 31, 2014
U.S. Government and agency
obligations . . . . . . . . . . . . . . . . . .
$ 4,515
$ (56)
$5,878
$(120)
$10,393
$(176)
State agency and municipal obligations
Corporate bonds
. . . . . . . . . . . . . . .
1,771
6,783
Government-sponsored mortgage
backed securities . . . . . . . . . . . . . .
1,406
(52)
(40)
(17)
—
995
—
—
(5)
—
1,771
7,778
(52)
(45)
1,406
(17)
Total investment securities . . . . . . .
$14,475
$(165)
$6,873
$(125)
$21,348
$(290)
December 31, 2013
U.S. Government and agency
obligations . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .
Corporate bonds
$ 5,797
—
Total investment securities . . . . . . .
$ 5,797
$(222)
—
$(222)
$ 910
1,961
$2,871
$ (89)
(38)
$(127)
$ 6,707
1,961
$ 8,668
$(311)
(38)
$(349)
There were 42 and eight individual investment securities, respectively, in which the fair value of the
security was less than the amortized cost of the security at December 31, 2014 and December 31, 2013.
The U.S. Government and agency obligations owned are either direct obligations of
the U.S.
Government or are issued by one of
the shareholder-owned corporations chartered by the U.S.
Government. The Company’s corporate and municipal bonds are all rated above investment grade. The U.S.
Government and agency obligations, state agency and municipal bonds, and corporate bonds have
experienced declines due to general market conditions. Management determined that there has been no
deterioration in credit quality subsequent to purchase and believes that unrealized losses are temporary,
resulting from recent market conditions.
7. Loans Receivable and Allowance for Loan Losses
Loans acquired in connection with the Wilton acquisition in November 2013 and the Quinnipiac
acquisition in October 2014 are referred to as “acquired” loans as a result of the manner in which they are
accounted for. All other loans are referred to as “originated” loans. Accordingly, selected credit quality
disclosures that follow are presented separately for the originated loan portfolio and the acquired loan
portfolio.
99
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth a summary of the loan portfolio at December 31, 2014 and 2013:
December 31, 2014
December 31, 2013
Originated
Acquired
Total
Originated
Acquired
Total
(In thousands)
Real estate loans:
Residential
. . . . . . . . . . . . . . . . .
$169,833
$
5,198
$175,031
$155,874
$ — $155,874
Commercial
. . . . . . . . . . . . . . . .
458,506
62,675
521,181
305,823
10,710
316,533
Construction . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . .
62,258
10,226
971
7,940
63,229
18,166
44,187
9,625
7,358
4,267
51,545
13,892
700,823
76,784
777,607
515,509
22,335
537,844
Commercial business . . . . . . . . . . . .
120,360
28,899
149,259
92,173
1,393
93,566
Consumer
. . . . . . . . . . . . . . . . . . .
243
2,653
2,896
225
377
602
Total loans . . . . . . . . . . . . . . . .
821,426
108,336
929,762
607,907
24,105
632,012
Allowance for loan losses . . . . . . . . .
Deferred loan origination fees, net . . .
Unamortized loan premiums . . . . . .
(10,860)
(2,937)
16
— (10,860)
(2,937)
—
16
—
(8,382)
(1,785)
16
—
(31)
—
(8,382)
(1,816)
16
Loans receivable, net
. . . . . . .
$807,645
$108,336
$915,981
$597,756
$24,074
$621,830
Lending activities are conducted principally in the Fairfield and New Haven 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
years ended December 31, 2014 and 2013:
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other(a)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,418
478
(136)
(378)
$1,382
$ —
1,513
(95)
—
$1,418
2014
2013
(In thousands)
(a) Represents changes in cash flows expected to be collected due to loan sales or payoffs.
Risk management
The Company has established credit policies applicable to each type of lending activity in which it
engages. The Company evaluates the creditworthiness of each customer and, in most cases, extends credit of
up to 80% of the market value of the collateral, depending on the borrowers’ creditworthiness and the type
of collateral. The market value of collateral is monitored on an ongoing basis 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
100
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
based on the borrower’s ability to generate continuing cash flows. The Company’s policy for residential
lending allows that, generally, the amount of the loan may not exceed 80% of the original appraised value of
the property. In certain situations, the amount may be up to 90 – 95% LTV either with private mortgage
insurance being required for that portion of the residential loan in excess of 80% of the appraised value of
the property or where secondary financing is provided by a housing authority program second mortgage, a
community’s low/moderate income housing program, a religious or civic organization. Private mortgage
insurance is required for that portion of the residential first mortgage loan in excess of 80% of the
appraised value of the property.
Credit quality of loans and the allowance for loan losses
Management segregates the loan portfolio into portfolio segments which is defined as the level at
which the Company develops and documents a systematic method for determining its allowance for loan
losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in
each loan type. Such risk factors are periodically reviewed by management and revised as deemed
appropriate.
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
if the estimated value of the completed project proves to be
value of the property. Moreover,
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.
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.
101
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 December 31, 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 years
ended December 31, 2014, 2013 and 2012, by portfolio segment:
Residential
Real Estate
Commercial
Real Estate Construction
Commercial
Business
Home
Equity
(In thousands)
Consumer Unallocated
Total
December 31, 2014 Originated
Beginning balance . . . . . . . .
Charge-offs . . . . . . . . . .
Recoveries . . . . . . . . . . .
Provisions . . . . . . . . . . .
Ending balance . . . . . . . . . .
Acquired
Beginning balance . . . . . . . .
Charge-offs . . . . . . . . . .
Recoveries . . . . . . . . . . .
Provisions . . . . . . . . . . .
Ending balance . . . . . . . . . .
Total
Beginning balance . . . . . . . .
Charge-offs . . . . . . . . . .
Recoveries . . . . . . . . . . .
Provisions . . . . . . . . . . .
Ending balance . . . . . . . . . .
$1,310
—
—
121
$1,431
$ —
—
—
—
$ —
$1,310
—
—
121
$1,431
$3,616
—
—
1,864
$5,480
$ —
—
—
—
$ —
$3,616
—
—
1,864
$5,480
$
9
(3)
425
(427)
4
$
$ —
—
—
—
$ —
$
9
(3)
425
(427)
4
$
$—
—
—
—
$—
$—
—
—
—
$—
$—
—
—
—
$—
$ 8,382
(3)
429
2,052
$10,860
$ —
(100)
—
100
$ —
$ 8,382
(103)
429
2,152
$10,860
$1,032
—
—
70
$1,102
$190
—
—
15
$205
$2,225
—
4
409
$2,638
$ — $ — $ —
—
—
—
$ — $ — $ —
(100)
—
100
—
—
—
$1,032
(100)
—
170
$1,102
$190
—
—
15
$205
$2,225
—
4
409
$2,638
102
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Residential
Real Estate
Commercial
Real Estate Construction
Commercial
Business
Home
Equity
(In thousands)
Consumer Unallocated Total
December 31, 2013 Originated
Beginning balance . . . . . . . .
Charge-offs . . . . . . . . . . .
Recoveries . . . . . . . . . . . .
Provisions . . . . . . . . . . . .
Ending balance . . . . . . . . . .
Acquired
Beginning balance . . . . . . . .
Charge-offs . . . . . . . . . . .
Recoveries . . . . . . . . . . . .
Provisions . . . . . . . . . . . .
Ending balance . . . . . . . . . .
Total
Beginning balance . . . . . . . .
Charge-offs . . . . . . . . . . .
Recoveries . . . . . . . . . . . .
Provisions . . . . . . . . . . . .
Ending balance . . . . . . . . . .
$1,230
—
—
80
$1,310
$ —
—
—
—
$ —
$1,230
—
—
80
$1,310
$3,842
(166)
—
(60)
$3,616
$ —
—
—
—
$ —
$3,842
(166)
—
(60)
$3,616
$ 929
—
—
103
$1,032
$220
—
—
(30)
$190
$1,718
—
—
507
$2,225
$ — $ — $ —
—
—
—
$ — $ — $ —
—
—
—
—
—
—
$ 929
—
—
103
$1,032
$220
—
—
(30)
$190
$1,718
—
—
507
$2,225
$ 2
(4)
26
(15)
$ 9
$ —
—
—
—
$ —
$ 2
(4)
26
(15)
$ 9
$—
—
—
—
$—
$—
—
—
—
$—
$—
—
—
—
$—
$7,941
(170)
26
585
$8,382
$ —
—
—
—
$ —
$7,941
(170)
26
585
$8,382
Residential
Real Estate
Commercial
Real Estate Construction
Commercial
Business
Home
Equity
(In thousands)
Consumer Unallocated Total
December 31, 2012
Beginning balance . . . . . . . .
Charge-offs . . . . . . . . . . .
Recoveries . . . . . . . . . . . .
Provisions . . . . . . . . . . . .
Ending balance . . . . . . . . . .
$1,290
(261)
—
201
$1,230
$2,519
—
—
1,323
$3,842
$1,007
(60)
—
(18)
$ 929
$274
—
—
(54)
$220
$1,317
—
—
401
$1,718
$ 11
(5)
21
(25)
$ 2
$ 7
—
—
(7)
$—
$6,425
(326)
21
1,821
$7,941
With respect to the originated portfolio, the allocation to each portfolio segment is not necessarily
indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance
to absorb losses in other portfolio segments.
103
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables are a summary, by portfolio segment and impairment methodology, of the
allowance for loan losses and related portfolio balances at December 31, 2014 and 2013:
Originated Loans
Acquired Loans
Portfolio Allowance Portfolio Allowance Portfolio Allowance
(In thousands)
Total
December 31, 2014
Loans individually evaluated for impairment:
Residential real estate . . . . . . . . . . . . . . . . . . . $
Commercial real estate . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal
. . . . . . . . . . . . . . . . . . . . . . . . . . $
864 $ — $
4,996
—
91
1,701
—
7,652 $
23
—
—
10
—
33 $
— $— $
—
—
—
629
—
629
—
—
—
—
—
$— $
864 $ —
23
—
—
10
—
33
4,996
—
91
2,330
—
8,281 $
Loans collectively evaluated for impairment:
Residential real estate . . . . . . . . . . . . . . . . . . . $168,969 $ 1,431 $
Commercial real estate . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . .
5,198
62,675
971
7,940
28,270
2,653
. . . . . . . . . . . . . . . . . . . . . . . . . . $813,774 $10,827 $107,707
453,510
62,258
10,135
118,659
243
5,457
1,102
205
2,628
4
Subtotal
$— $174,167 $ 1,431
5,457
516,185
—
1,102
63,229
—
205
18,075
—
2,628
146,929
—
—
4
2,896
$— $921,481 $10,827
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . $821,426 $10,860 $108,336
$— $929,762 $10,860
Originated Loans
Acquired Loans
Portfolio Allowance Portfolio Allowance Portfolio Allowance
(In thousands)
Total
December 31, 2013
Loans individually evaluated for impairment:
Residential real estate . . . . . . . . . . . . . . . . . . . $
Commercial real estate . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,867 $
1,117
—
97
642
—
73 $ — $— $
—
56
—
—
—
4
—
12
—
—
—
—
—
—
—
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,723 $ 145 $ — $— $
1,867 $
1,117
—
97
642
—
73
56
—
4
12
—
3,723 $ 145
Loans collectively evaluated for impairment:
Residential real estate . . . . . . . . . . . . . . . . . . . $154,007 $1,237 $ — $— $154,007 $1,237
3,560
Commercial real estate . . . . . . . . . . . . . . . . . . .
—
1,032
Construction . . . . . . . . . . . . . . . . . . . . . . . . .
—
187
Home equity . . . . . . . . . . . . . . . . . . . . . . . . .
—
2,212
Commercial business . . . . . . . . . . . . . . . . . . . .
—
—
9
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . .
$— $628,289 $8,237
10,710
7,358
4,267
1,393
377
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . $604,184 $8,237 $24,105
315,416
51,545
13,795
92,924
602
304,706
44,187
9,528
91,531
225
3,560
1,032
187
2,212
9
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $607,907 $8,382 $24,105
$— $632,012 $8,382
104
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Credit quality indicators
The Company’s policies provide for the classification of loans into the following categories: pass,
special mention, substandard, doubtful and loss. Consistent with regulatory guidelines, loans that are
considered to be of lesser quality are classified as substandard, doubtful, or loss assets. A loan is considered
substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of
the collateral pledged, if any. Substandard loans include those loans characterized by the distinct possibility
that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful
have all of the weaknesses inherent in those classified substandard with the added characteristic that the
weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions
and values, highly questionable and improbable. Loans classified as loss are those considered uncollectible
and of such little value that their continuance as loans is not warranted. Loans that do not expose the
Company to risk sufficient to warrant classification in one of the aforementioned categories, but which
possess potential weaknesses that deserve close attention, are designated as special mention.
Loans that are considered to be impaired are analyzed to determine whether a loss is possible and if so,
a calculation is performed to determine the possible loss amount. If it is determined that the loss amount is
$0, no reserve is held against the asset. If a loss is calculated, then a specific reserve for that asset is
determined.
The following tables are a summary of the loan portfolio quality indicators by portfolio segment at
December 31, 2014 and 2013:
Commercial Credit Quality Indicators
At December 31, 2014
At December 31, 2013
Commercial
Real Estate Construction
Commercial
Business
Commercial
Real Estate Construction
Commercial
Business
Originated loans:
Pass . . . . . . . . . . . . . . . . . . . . . . . . $452,974
2,096
Special mention . . . . . . . . . . . . . . . .
3,436
Substandard . . . . . . . . . . . . . . . . . .
—
. . . . . . . . . . . . . . . . . . . .
Doubtful
—
. . . . . . . . . . . . . . . . . . . . . . .
Loss
458,506
Total originated loans . . . . . . . . . .
Acquired loans:
Pass . . . . . . . . . . . . . . . . . . . . . . . .
Special mention . . . . . . . . . . . . . . . .
Substandard . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
Doubtful
. . . . . . . . . . . . . . . . . . . . . . .
Loss
Total acquired loans . . . . . . . . . . .
Total
61,017
—
1,658
—
—
62,675
. . . . . . . . . . . . . . . . . . . . . $521,181
$62,258
—
—
—
—
62,258
136
—
835
—
—
971
$63,229
(In thousands)
$115,323 $304,469
237
1,117
—
—
305,823
5,037
—
—
—
120,360
27,074
659
1,166
—
—
28,899
10,351
24
335
—
—
10,710
$149,259 $316,533
$44,187
—
—
—
—
44,187
4,689
161
2,508
—
—
7,358
$51,545
$91,093
438
642
—
—
92,173
825
252
316
—
—
1,393
$93,566
105
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Residential and Consumer Credit Quality Indicators
At December 31, 2014
At December 31, 2013
Residential
Real Estate Home Equity Consumer
Residential
Real Estate Home Equity Consumer
Originated loans:
Pass . . . . . . . . . . . . . . . . . . . . . . . . . . $168,969
864
Special mention . . . . . . . . . . . . . . . . . .
—
Substandard . . . . . . . . . . . . . . . . . . . .
—
Doubtful . . . . . . . . . . . . . . . . . . . . . . .
—
Loss . . . . . . . . . . . . . . . . . . . . . . . . . .
169,833
Total originated loans . . . . . . . . . . . .
Acquired loans:
5,022
Pass . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Special mention . . . . . . . . . . . . . . . . . .
176
Substandard . . . . . . . . . . . . . . . . . . . .
—
Doubtful . . . . . . . . . . . . . . . . . . . . . . .
—
Loss . . . . . . . . . . . . . . . . . . . . . . . . . .
5,198
Total acquired loans . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . $175,031
$10,135
91
—
—
—
10,226
7,925
—
15
—
—
7,940
$18,166
(In thousands)
$ 243 $153,443
2,431
—
—
—
155,874
—
—
—
—
243
2,653
—
—
—
—
2,653
—
—
—
—
—
—
$2,896 $155,874
$ 9,447
178
—
—
—
9,625
4,221
—
46
—
—
4,267
$13,892
$225
—
—
—
—
225
234
143
—
—
—
377
$602
Loan portfolio aging analysis
When a loan is 15 days past due, the Company sends the borrower a late notice. The Company also
contacts the borrower by phone if the delinquency is not corrected promptly after the notice has been sent.
When the loan is 30 days past due, the Company mails the borrower a letter reminding the borrower of the
delinquency, and attempts to contact the borrower personally to determine the reason for the delinquency
and ensure the borrower understands the terms of the loan. If necessary, subsequent delinquency notices
are issued and the account will be monitored on a regular basis thereafter. By the 90th day of delinquency,
the Company will send the borrower a final demand for payment and may recommend foreclosure. A
summary report of all loans 30 days or more past due is provided to the board of directors of the Company
each month. Loans greater than 90 days past due are generally put on nonaccrual status. A nonaccrual loan
is restored to accrual status when it is no longer delinquent and collectability of interest and principal is no
longer in doubt. A loan is considered to be no longer delinquent when timely payments are made for a
period of at least six months (one year for loans providing for quarterly or semi-annual payments) by the
borrower in accordance with the contractual terms.
106
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables set forth certain information with respect to our loan portfolio delinquencies by
portfolio segment and amount as of December 31, 2014 and December 31, 2013:
As of December 31, 2014
31 – 60 Days
Past Due
61 – 90 Days
Past Due
Greater Than
90 Days
Total Past
Due
(In thousands)
Carrying
Amount > 90 Days
and Accruing
Current
Originated Loans
Real estate loans:
Residential real estate . . . . . . . .
Commercial real estate . . . . . . .
Construction . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . .
Commercial business . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . .
Total originated loans . . . . . . .
Acquired Loans
Real estate loans:
Residential real estate . . . . . . . .
Commercial real estate . . . . . . .
Construction . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . .
Commercial business . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . .
Total acquired loans . . . . . . . .
Total loans . . . . . . . . . . . . . .
$ —
—
—
—
—
—
—
339
685
—
—
178
3
1,205
$1,205
$ —
—
—
—
—
—
—
—
677
—
40
386
—
1,103
$1,103
$ — $ — $169,833
455,070
3,436
— 62,258
— 10,226
— 120,360
243
—
817,990
3,436
3,436
—
—
—
—
3,436
294
836
835
—
305
—
2,270
$5,706
633
2,198
835
40
869
3
4,578
4,565
60,477
136
7,900
28,030
2,650
103,758
$8,014 $921,748
As of December 31, 2013
$ —
216
—
—
—
—
216
176
466
835
—
305
—
1,782
$1,998
31 – 60 Days
Past Due
61 – 90 Days
Past Due
Greater Than
90 Days
Total Past
Due
(In thousands)
Carrying
Amount > 90 Days
and Accruing
Current
Originated Loans
Real estate loans:
Residential real estate . . . . . . . .
Commercial real estate . . . . . . .
Construction . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . .
Commercial business . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . .
Total originated loans . . . . . . .
Acquired Loans
Real estate loans:
Residential real estate . . . . . . . .
Commercial real estate . . . . . . .
Construction . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . .
Commercial business . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . .
Total acquired loans . . . . . . . .
Total loans . . . . . . . . . . . . . .
$—
—
—
—
—
—
—
—
—
—
—
—
—
—
$—
$1,003
—
—
—
—
—
1,003
—
797
2,508
—
315
—
3,620
$4,623
$1,003 $154,871
— 305,823
— 44,187
9,625
—
— 92,173
225
—
606,904
1,003
—
797
2,508
—
315
—
3,620
—
9,913
4,850
4,267
1,078
377
20,485
$4,623 $627,389
$ —
—
—
—
—
—
—
—
797
2,508
—
315
—
3,620
$3,620
$—
—
—
—
—
—
—
—
—
—
—
—
—
—
$—
107
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Loans on nonaccrual status
The following is a summary of nonaccrual loans by portfolio segment as of December 31, 2014 and
2013:
December 31,
2014
2013
(In thousands)
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ —
$1,003
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,220
142
—
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,362
$1,003
The amount of income that was contractually due but not recognized on originated nonaccrual loans
totaled $8 thousand, $23 thousand and $276 thousand for the years ended December 31, 2014, 2013 and
2012, respectively. The amount of actual interest income recognized on these loans was $190 thousand, $8
thousand and $113 thousand for the years ended December 31, 2014, 2013 and 2012, respectively.
At December 31, 2014 and 2013, there were no commitments to lend additional funds to any borrower
on nonaccrual status.
The preceding table excludes acquired loans that are accounted for as purchased credit impaired loans
totaling $1.9 million and $6.2 million, respectively at December 31, 2014 and 2013. Such loans otherwise
meet the Company’s definition of a nonperforming loan but are excluded because the loans are included in
loan pools that are considered performing. The discounts arising from recording these loans at fair value
were due, in part, to credit quality. The acquired loans are accounted for on either a pool or individual basis
and the accretable yield is being recognized as interest income over the life of the loans based on expected
cash flows.
Impaired loans
An impaired loan generally is one for which it is probable, based on current information, the Company
will not collect all the amounts due under the contractual terms of the loan. Loans are individually
evaluated for impairment. When the Company classifies a problem loan as impaired, it provides a specific
valuation allowance for that portion of the asset that is deemed uncollectible.
108
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes impaired loans by portfolio segment and the average carrying amount
and interest income recognized on impaired loans by portfolio segment as of December 31, 2014, 2013 and
2012:
As of and for the Year Ended December 31, 2014
Carrying
Amount
Unpaid
Principal
Balance
Average
Carrying
Amount
Associated
Allowance
(In thousands)
Interest
Income
Recognized
Originated
Impaired loans without a valuation allowance:
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . .
Total impaired loans without a valuation allowance . . .
Impaired loans with a valuation allowance:
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . .
Total impaired loans with a valuation allowance . . . . . .
Total originated impaired loans . . . . . . . . . . . . . . . .
Acquired
Impaired loans without a valuation allowance:
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . .
Total impaired loans without a valuation allowance . . .
Impaired loans with a valuation allowance:
$ 864
4,543
91
1,145
$6,643
$ 453
556
$1,009
$7,652
$ 864
4,544
91
1,153
$6,652
$ 453
556
$1,009
$7,661
$ 629
$ 629
$ 629
$ 629
Total impaired loans with a valuation allowance . . . . . .
Total acquired impaired loans . . . . . . . . . . . . . . . . .
$ — $ —
$ 629
$ 629
$—
—
—
—
$—
$23
10
$33
$33
$—
$—
$—
$—
$ 864
4,034
95
1,226
$6,219
$ 457
596
$1,053
$7,272
$ 28
223
3
52
$306
$ 29
32
$ 61
$367
$ 607
$ 607
$ 28
$ 28
$ — $ —
$ 28
$ 607
As of and for the Year Ended December 31, 2013
Carrying
Amount
Unpaid
Principal
Balance
Average
Carrying
Amount
Associated
Allowance
(In thousands)
Interest
Income
Recognized
Originated
Impaired loans without a valuation allowance:
Total impaired loans without a valuation allowance . .
$ — $ — $ — $ — $ —
Impaired loans with a valuation allowance:
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . .
Total impaired loans with a valuation allowance . . . . .
Total originated impaired loans . . . . . . . . . . . . . . .
Acquired
Impaired loans without a valuation allowance:
$1,867
1,117
97
642
$3,723
$3,723
$1,880
1,117
97
642
$3,736
$3,736
$ 73
56
4
12
$145
$145
$1,896
1,127
221
680
$3,924
$3,924
$ 36
56
7
37
$136
$136
Total impaired loans without a valuation allowance . .
$ — $ — $ — $ — $ —
Impaired loans with a valuation allowance:
Total impaired loans with a valuation allowance . . . . .
Total acquired impaired loans . . . . . . . . . . . . . . . .
$ — $ — $ — $ — $ —
$ — $ — $ — $ — $ —
109
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Impaired loans without a valuation allowance:
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . .
Impaired loans with a valuation allowance: . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . .
Total impaired loans with a valuation allowance . . . . .
Total impaired loans . . . . . . . . . . . . . . . . . . . . . . .
Troubled debt restructurings (TDRs)
As of and for the Year Ended December 31, 2012
Carrying
Amount
Unpaid
Principal
Balance
Associated
Allowance
Average
Carrying
Amount
Interest
Income
Recognized
$2,137
$2,137
$ — $2,273
$ 47
1,817
194
$2,011
$4,148
1,817
194
$2,011
$4,148
249
9
$258
$258
2,461
198
$2,659
$4,932
44
14
$ 58
$105
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.
If a performing loan is restructured into a TDR it remains in performing status. If a nonperforming
loan is restructured into a TDR, it continues to be carried in nonaccrual status. Nonaccrual classification
may be removed if the borrower demonstrates compliance with the modified terms for a minimum of six
months. Troubled debt restructured loans are reported as such for at least one year from the date of
restructuring. In years after the restructuring, troubled debt restructured loans are removed from this
classification if the restructuring agreement specifies a market rate of interest equal to that which would be
provided to a borrower with similar credit at the time of restructuring and the loan is not deemed to be
impaired based on the modified terms.
The recorded investment in TDRs was $3.6 million at December 31, 2014 and $1.6 million at
December 31, 2013.
The following table presents loans whose terms were modified as TDRs during the periods presented:
Outstanding Recorded Investment
Number of Loans
Pre-Modification
Post-Modification
2014
2013
2014
2013
2014
2013
(Dollars in thousands)
Years ended December 31,
Commercial real estate . . . . . . . . . . . . . . .
2
Home equity . . . . . . . . . . . . . . . . . . . . . . —
4
Commercial business . . . . . . . . . . . . . . . .
$— $1,317
— $1,317
1
—
— 97
782 —
$—
— 97
782 —
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
6
1
$2,099
$97
$2,099
$97
All TDRs at December 31, 2014 and 2013 were performing in compliance under their modified terms
and therefore, were on accrual status.
110
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table provides information on how loans were modified as a TDR for the years ended
December 31, 2014 and 2013.
December 31,
2014
2013
(In thousands)
Maturity/amortization concession . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 946
Payment concession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,153
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,099
$97
—
$97
There was no loans modified in a troubled debt restructuring, for which there was a payment default
during the years ended December 31, 2014 and 2013, respectively.
8. Premises and Equipment
At December 31, 2014 and 2013, premises and equipment consisted of the following:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . .
December 31,
2014
2013
(In thousands)
$ 2,300
6,346
4,280
1,842
3,221
17,989
(6,079)
$ 1,450
3,544
3,157
1,456
2,090
11,697
(4,637)
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,910
$ 7,060
For the years ended December 31, 2014, 2013 and 2012, depreciation and amortization expense related
to premises and equipment totaled $1.2 million, $666 thousand and $612 thousand, respectively.
9. Deposits
At December 31, 2014 and 2013, deposits consisted of the following:
December 31,
2014
2013
(In thousands)
Noninterest bearing demand deposit accounts
Interest bearing accounts:
. . . . . . . . . . . . . . . . . .
$166,030
$118,618
NOW and money market
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
276,501
84,457
308,451
Total interest bearing accounts . . . . . . . . . . . . . . . . . . . . . . . . . .
669,409
238,231
107,692
197,004
542,927
Total deposits
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$835,439
$661,545
111
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contractual maturities of
time certificates of deposit as of December 31, 2014 and 2013 are
summarized below:
December 31,
2014
2013
(In thousands)
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
173,265
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
244,674
12,294
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,462
14,657
9,968
9,690
5,707
5,738
—
—
$308,451
$197,004
Time certificates of deposit in denominations of $100,000 or more were approximately $239.8 million,
and $150.8 million at December 31, 2014 and 2013, respectively. The Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Dodd-Frank Act”), signed into law on July 21, 2010, permanently raised
the maximum deposit insurance amount to $250,000, retroactive to January 1, 2008. The aggregate amount
of individual certificate accounts with balances of $250,000 or more were approximately $61.7 million and
$40.5 million at December 31, 2014 and 2013, respectively.
The following table summarizes interest expense by account type for the years ended December 31,
2014, 2013 and 2012:
Years Ended December 31,
2014
2013
2012
(In thousands)
NOW and money market . . . . . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
Time certificates of deposit
$ 894
302
2,099
$ 547
543
1,143
Total interest expense on deposits . . . . . . . . . . . . . . . . .
$3,295
$2,233
$ 657
846
864
$2,367
10. Federal Home Loan Bank Advances and Other Borrowings
The following is a summary of FHLB advances with maturity dates and weighted average rates at
December 31, 2014 and 2013:
December 31,
2014
2013
Amount
Due
Weighted
Average
Rate
Amount
Due
(Dollars in thousands)
Weighted
Average
Rate
Year of Maturity:
2014 . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . .
—
109,000
20,000
—
0.31
0.99
22,000
2,000
20,000
0.50
2.75
0.99
Total advances . . . . . . . . . . . . . . . . . . . . . .
$129,000
0.42%
$44,000
0.83%
$25.0 million of the above mentioned FHLB advances are subject to interest rate swap transactions.
112
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Bank has additional borrowing capacity at the FHLB, in excess of outstanding advances, up to a
certain percentage of the value of qualified collateral, as defined in the FHLB Statement of Products Policy,
at the time of the borrowing. In accordance with agreements with the FHLB, the qualified collateral must
be free and clear of liens, pledges and encumbrances. As of December 31, 2014 the Company has
immediate availability to borrow $123.8 million based on qualified collateral.
Additionally, the Bank has access to a pre-approved secured line of credit of $450 thousand with the
FHLB, none of which was outstanding at December 31, 2014 and 2013.
The Bank has an unsecured line of credit with Bankers’ Bank Northeast of $7.5 million and $2.0
million at December 31, 2014 and 2013, respectively, none of which was outstanding at December 31, 2014
and 2013.
Federal Home Loan Bank Stock
As a member of the FHLB, the Bank is required to maintain investments in their capital stock. The
Bank owned 63,486 and 48,342 shares at December 31, 2014 and 2013, respectively. There is no ready
market or quoted market values for the stock. The shares have a par value of $100 and are carried on the
consolidated balance sheets at cost, as the stock is only redeemable at par subject to the redemption
practices of the FHLB.
11. Commitments and Contingencies
Leases
The Company leases its corporate office space, as well as all but two branch locations, plus certain
equipment under operating lease agreements, which expire at various dates through 2028. In addition to
rental payments, the leases require payment of property taxes and certain common area maintenance fees.
At December 31, 2014 and 2013, future minimum rental commitments under the terms of these leases by
year were as follows:
Period Ending December 31,
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
2013
(In thousands)
$ —
1,788
1,767
1,159
829
3,743
$9,286
$ 1,718
1,714
1,196
1,165
914
4,190
$10,897
Total rental expense approximated $1.6 million, $1.5 million and $1.3 million for the years ended
December 31, 2014, 2013 and 2012, respectively.
Legal matters
The Company is involved in various legal proceedings which have arisen in the normal course of
business. Management believes that resolution of these matters will not have a material effect on the
Company’s financial condition or results of operations.
Off-balance sheet instruments
In the normal course of business, the Company is a party to financial instruments with off-balance
sheet risk to meet the financing needs of its customers. These financial instruments include commitments to
113
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
extend credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the
amounts recognized in the financial statements. The contractual amounts of these instruments reflect the
extent of involvement the Company has in particular classes of financial instruments.
The contractual amounts of commitments to extend credit represents the amounts of potential
accounting loss should the contract be fully drawn upon, the customer’s default, and the value of any
existing collateral becomes worthless. Management uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments and evaluates each customer’s
creditworthiness on a case-by-case basis. Management believes that they control the credit risk of these
financial instruments through credit approvals, credit limits, monitoring procedures and the receipt of
collateral as deemed necessary.
Financial instruments whose contract amounts represented credit risk at December 31, 2014 and 2013
were as follows:
December 31,
2014
2013
(In thousands)
Commitments to extend credit:
Loan commitments
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Undisbursed construction loans . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unused home equity lines of credit . . . . . . . . . . . . . . . . . . . . . . . . .
$ 83,013
61,095
12,340
$ 61,633
44,670
11,575
$156,448
$117,878
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments to extend credit generally have fixed expiration
dates or other termination clauses and may require payment of a fee by the borrower. Since these
commitments could expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The amount of collateral obtained,
if deemed necessary by the
Company upon extension of credit, is based on management’s credit evaluation of the counter party.
Collateral held varies, but may include residential and commercial property, deposits and securities.
12. Income Taxes
Income tax expense for the years ended December 31, 2014, 2013 and 2012 consisted of:
2014
2013
2012
(In thousands)
Current provision:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,147
718
2,865
$1,944
597
2,541
$1,018
416
1,434
Deferred provision:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(557)
(139)
(696)
(385)
28
(357)
(508)
(269)
(777)
Total income tax expense . . . . . . . . . . . . . . . . . . . .
$2,169
$2,184
$ 657
114
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the anticipated income tax expense, computed by applying the statutory federal
income tax rate of 34% to the income before income taxes, to the amount reported in the consolidated
statements of income for the years ended December 31, 2014, 2013 and 2012 was as follows:
Income tax expense at statutory federal rate . . . . . . . . . . . .
State tax expense, net of federal tax effect
. . . . . . . . . . . . .
Gain from bargain purchase . . . . . . . . . . . . . . . . . . . . . . .
Income exempt from tax . . . . . . . . . . . . . . . . . . . . . . . . .
Other items, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense before change in valuation allowance . .
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
$2,291
259
—
(523)
19
2,046
123
$2,169
December 31,
2013
(In thousands)
$2,497
239
(453)
(294)
21
2,010
174
$2,184
2012
$ 636
161
—
(281)
205
721
(64)
$ 657
At December 31, 2014 and 2013, the components of deferred tax assets and liabilities were as follows:
December 31,
2014
2013
(In thousands)
Deferred tax assets:
Allowance for loan losses
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase accounting adjustments . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Start-up costs
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on derivatives
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax receivable, net of valuation allowance . . . . . . . . . . . .
Deferred tax liabilities:
Tax bad debt reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on available for sale securities . . . . . . . . . . . . . . . . .
Gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,314
1,539
504
1,144
916
346
73
647
9,483
(806)
8,677
740
370
411
1,521
$7,156
$3,348
1,479
1,094
707
271
213
—
512
7,624
(682)
6,942
499
327
271
1,097
$5,845
At December 31, 2014, the Company had federal net operating loss carryovers of $3.2 million. The
carryovers were transferred to the Company upon the merger with the Wilton Bank. The losses will expire
after 2032 and are subject to certain annual limitations which amount to $176 thousand per year.
In addition, at December 31, 2014 and 2013, there were net operating loss carry forwards of
approximately $9.3 million and $6.0 million, respectively, for state tax purposes that were available to reduce
future state taxable income. A valuation allowance against deferred tax assets is required if, based on the
weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be
realized. At December 31, 2014 and 2013, management recorded a valuation allowance against the deferred
tax benefits of the state operating loss carry forwards and other state deferred tax assets for the Bank
Holding Company.
115
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Management regularly analyzes their tax positions and at December 31, 2014, does not believe that the
Company has taken any tax positions where future deductibility is not certain. As of December 31, 2014,
the Company is subject to unexpired statutes of limitation for examination of its tax returns for U.S. federal
and Connecticut income taxes for the years 2011 through 2013.
13. 401(K) Profit Sharing Plan
The Company’s employees are eligible to participate in The Bankwell Financial Group, Inc. and its
Subsidiaries and Affiliates 401(k) Plan (the “401k Plan”). The 401k Plan covers substantially all employees
who are 21 years of age. Under the terms of the 401k Plan, participants can contribute up to a certain
percentage of
limitations. The Company matches eligible
to federal
contributions and may make discretionary matching and/or profit sharing contributions. Participants are
immediately vested in their contributions and become fully vested in the Company’s contributions after
completing five years of service. The Company contributed $151 thousand, $127 thousand and $102
thousand to the 401k Plan during the years ended December 31, 2014, 2013 and 2012, respectively.
their compensation, subject
14. Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing income available to common shareholders by
the weighted-average number of shares of common stock outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to issue common stock (such as stock
options) were exercised or converted into common stock or resulted in the issuance of common stock that
then shared in earnings. Unvested share-based payment awards, which include the right to receive
non-forfeitable dividends, are considered to participate with common stock in undistributed earnings for
purposes of computing EPS.
The Company’s unvested restricted stock awards are participating securities, and therefore, are
included in the computation of both basic and diluted earnings per common share. EPS is calculated using
the two-class method, under which calculations (1) exclude from the numerator any dividends paid or owed
on participating securities and any undistributed earnings considered to be attributable to participating
securities and (2) exclude from the denominator the dilutive impact of the participating securities.
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:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock dividends and net accretion . . . . . . . . . . . .
Dividends and undistributed earnings allocated to
For the Years Ended December 31,
2014
2013
2012
(In thousands, except per share data)
$4,568
(110)
$5,161
(111)
$1,214
(132)
participating securities . . . . . . . . . . . . . . . . . . . . . . . . .
(81)
(89)
—
Net income for earnings per share calculation . . . . . . . . . .
$4,377
$4,961
$1,082
Weighted average shares outstanding, basic . . . . . . . . . . . .
Effect of dilutive equity-based awards . . . . . . . . . . . . . . . .
Weighted average shares outstanding, diluted . . . . . . . . . . .
5,578
28
5,606
3,395
56
3,451
Net earnings per common share:
Basic earnings per common share . . . . . . . . . . . . . . . . .
$ 0.78
$ 1.46
Diluted earnings per common share . . . . . . . . . . . . . . .
0.78
1.44
2,768
97
2,865
$ 0.39
0.38
116
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Stock-Based Compensation Plans
Equity award plans
The Company has five equity award plans, which are collectively referred to as the “Plan”.
Any future issuances of equity awards will be made under the 2012 Plan and/or any new plan adopted
by the Company and its shareholders in the future. All equity awards made under the 2012 Plan are made
by means of an award agreement, which contains the specific terms and conditions of the grant. At
December 31, 2014, there were 424,292 shares reserved for future issuance under the 2012 Plan.
Share Options: As discussed in Note 1, the Company accounts for stock options based on the fair value
at the date of grant and records expense over the vesting period of such awards on a straight line basis.
Options vest over periods up to 5 years. For the years ended December 31, 2014, 2013, and 2012, the
Company recorded expense related to options granted under the various plans of approximately $32
thousand, $41 thousand, and $82 thousand, respectively.
There were no options granted during the years ended December 31, 2014 and 2013. The fair value of
options granted during the year ended December 31, 2012 was estimated at the grant date using the
minimum value option-pricing model with the following weighted average assumptions for the grants:
Weighted average expected lives, in years
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected stock price volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected annual forfeiture rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.5
1.81%
35.00%
6.00%
Year Ended
December 31, 2012
A summary of the status of outstanding stock options at December 31, 2014, 2013 and 2012, and
changes during the periods then ended, were as follows:
Options outstanding at beginning of
period . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . .
Issued resulting from Acquisitions . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . .
2014
December 31,
2013
2012
Weighted
Average
Exercise
Price
$16.67
—
17.86
18.32
10.17
17.77
Number
of Shares
208,568
—
61,040
(4,270)
(20,305)
(40,240)
Weighted
Average
Exercise
Price
$15.23
—
—
17.42
10.02
10.00
Number
of Shares
272,358
—
—
(4,080)
(46,640)
(13,070)
Weighted
Average
Exercise
Price
$14.60
15.00
—
13.13
—
—
Number
of Shares
277,558
9,650
—
(14,850)
—
—
Options outstanding at end of period . . . . .
204,793
17.42
208,568
16.67
272,358
15.23
Options exercisable at end of period . . . . . .
193,432
17.55
188,852
16.84
241,237
15.23
Weighted-average fair value of options
granted during the period . . . . . . . . . . . .
N/A
N/A
$ 6.54
Total intrinsic value is the amount by which the fair value of the underlying stock exceeds the exercise
price of an option on the exercise date. The total intrinsic value of share options exercised during the years
ended December 31, 2014, 2013 and 2012 was $214 thousand, $544 thousand and $0, respectively.
117
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restricted Stock: Service condition restricted stock provides grantees with rights to shares of
common stock upon completion of a service period. Shares of unvested restricted stock are participating
securities and considered outstanding. Service condition restricted stock awards generally vest over one to
five years. The following table presents the activity for restricted stock for the years ended December 31,
2014, 2013 and 2012:
2014
Weighted
Average
Grant Date
Fair Value
Number
of Shares
Unvested at beginning of period . . . . . .
122,140
$15.98
Granted . . . . . . . . . . . . . . . . . . . . .
127,610
Vested . . . . . . . . . . . . . . . . . . . . . .
(32,237)
Forfeited . . . . . . . . . . . . . . . . . . . .
(51,651)
Unvested at end of period . . . . . . . . . .
165,862
19.09
17.62
15.89
18.08
December 31,
2013
Weighted
Average
Grant Date
Fair Value
$15.00
16.38
14.92
15.95
15.98
Number
of Shares
49,500
87,456
(12,900)
(1,916)
122,140
2012
Weighted
Average
Grant Date
Fair Value
$15.96
15.00
15.96
—
Number
of Shares
30,000
49,500
(30,000)
—
49,500
15.00
The Company’s restricted stock expense for the years ended December 31, 2014, 2013 and 2012 was
$542 thousand, $268 thousand and $481 thousand, respectively.
Market Conditions Restricted Stock: On December 9, 2014 the Company issued restricted stock with
market and service conditions pursuant to the Company’s 2012 Stock Plan. The maximum number of
shares that can vest is 49,400. The actual number of shares to be vested will be based on market criteria
over a five-year period ending on December 1, 2019 based on the Company’s stock price being at or above
$25.00, $27.00 and $29.00 per share over a 60-day consecutive period. These shares may vest over a period
from December 1, 2017 to December 1, 2019 based on meeting the price targets. In addition, the grantees
must be employed with the Company on the vesting date to receive the shares. The Company determined
the fair value of these market condition awards in accordance with ASC 718 — Stock Compensation using
the Monte Carlo simulation model deemed appropriate for this type of grant. The grant date fair value for
these grants was $11.63 for the awards that vest at the $25 stock price, $10.30 for the awards that vest at the
$27 stock price and $9.10 for the awards that vest at the $29 stock price. The grant date fair value for the
Company’s stock was $18.99 per share. The Company recognized $14 thousand in stock compensation
expense for the year ended December 31, 2014 for these restricted stock awards.
16. Comprehensive Income
Comprehensive income represents the sum of net income and items of other comprehensive income or
loss, including net unrealized gains or losses on securities available for sale and net gains or losses on
derivatives accounted for as cash flow hedges. The Company’s total comprehensive income or loss for the
year ended December 31, 2014, 2013 and 2012 is reported in the Consolidated Statements of
Comprehensive Income.
118
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the changes in accumulated other comprehensive income (loss) by
component, net of tax for the year ended December 31, 2014, 2013 and 2012:
Net Unrealized Gain
(Loss) on Available
for Sale Securities
Net Unrealized Gain
(Loss) on Interest
Rate Swap
(In thousands)
Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) before reclassifications . .
Amounts reclassified from accumulated other comprehensive
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net other comprehensive income (loss) . . . . . . . . . . . . . . . .
Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . .
$424
220
—
220
$644
$ —
(113)
—
(113)
$(113)
Net Unrealized
Gain
(Loss) on Available
for Sale Securities
(In thousands)
Total
$424
107
—
107
$531
Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss before reclassifications . . . . . . . . . . . . . . . . . . . . . .
Amounts reclassified from accumulated other comprehensive income . . . . . . .
Net other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
810
701
—
701
Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,511
Other comprehensive loss before reclassifications . . . . . . . . . . . . . . . . . . . . . .
Amounts reclassified from accumulated other comprehensive income . . . . . . .
Net other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,087)
—
(1,087)
Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
424
17. Derivative Instruments
The Company entered into derivative transactions in February, 2014 and December, 2014. Information
about derivative instruments at December 31, 2014 was as follows:
Cash flow hedge:
Interest rate swap on FHLB advance . . . . . . . . . .
Interest rate swap on forward-starting FHLB
Notional
Amount
Maturity
Received
Paid
(Dollars in thousands)
Fair
Value
$25,000
4.7 years
0.26% 1.62% $ (73)
advance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$25,000
5.0 years
0.26% 1.83% $(113)
The effective portion of unrealized changes in the fair value of derivatives accounted for as cash flow
hedges is reported in other comprehensive income and subsequently reclassified to earnings in the same
period or periods during which the hedged forecasted transaction affects earnings. The Bank assesses the
effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging
instrument with the changes in cash flows of the designated hedged item or transaction. The ineffective
portion of changes in the fair value of the derivatives is recognized directly in earnings.
The Bank’s cash flow hedge positions are all forward starting interest rate swap transactions. The Bank
entered into the following forward starting interest rate swap transactions:
119
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Notional
Amount
Effective Date of
Hedged Borrowing
Duration of
Borrowing
Counterparty
(Dollars in thousands)
Type of borrowing:
FHLB 90-day advance . . . . . . . . .
$25,000
April 1, 2014
4.7 years Bank of Montreal
FHLB 90-day advance . . . . . . . . .
$25,000
January 2, 2015
5.0 years Bank of Montreal
This hedge strategy converts the LIBOR based rate of interest on certain FHLB advances to fixed
interest rates, thereby protecting the Bank from floating interest rate variability.
Changes in the consolidated statements of comprehensive income related to interest rate derivatives
designated as hedges of cash flows were as follows for the year ended December 31, 2014:
Interest rate swap on FHLB advance:
Unrealized loss recognized in accumulated other comprehensive income . . . . . .
Income tax benefit on items recognized in accumulated other comprehensive
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense recognized on hedged FHLB advance . . . . . . . . . . . . . . . . . .
$(186)
73
$(113)
$ 264
December 31, 2014
(In thousands)
18. Fair Value of Financial Instruments
GAAP requires disclosure of fair value information about financial instruments, whether or not
recognized in the statements of condition, for which it is practicable to estimate that value. In cases where
quoted market prices are not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the assumptions used, including the
discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparisons to independent markets and,
in many cases, could not be realized in
immediate settlement of the instrument.
Management uses its best judgment in estimating the fair value of
there are inherent weaknesses in any estimation technique. Therefore,
the Company’s financial
instruments; however,
for
substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative
of the amounts the Company could have realized in a sales transaction. The estimated fair value amounts
have been measured as of the respective period-ends, and have not been reevaluated or updated for
purposes of these consolidated financial statements subsequent to those respective dates. As such, the
estimated fair values of these financial instruments subsequent to the respective reporting dates may be
different than the amounts reported at each period-end.
120
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The carrying values, fair values and placement in the fair value hierarchy of the Company’s financial
instruments at December 31, 2014 and 2013 were as follows:
December 31, 2014
Financial Assets:
Cash and due from banks . . . . . . . . . . . . . . . .
Available for sale securities . . . . . . . . . . . . . . .
Held to maturity securities
. . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . .
Loans receivable, net . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . .
FHLB stock . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Liabilities:
Demand deposits . . . . . . . . . . . . . . . . . . . . . .
NOW and money market
. . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . .
Advances from the FHLB . . . . . . . . . . . . . . . .
Derivative liability . . . . . . . . . . . . . . . . . . . . .
Carrying
Value
Fair
Value
$ 48,559
65,009
11,454
586
915,981
3,323
6,109
$166,030
276,501
84,457
308,451
129,000
186
$ 48,559
65,009
11,470
586
920,031
3,323
6,109
$166,030
276,501
84,457
310,165
128,961
186
Level 2
Level 3
Level 1
(In thousands)
$48,559
$ — $
— 65,009
— 11,470
586
—
—
—
—
—
—
—
—
— 920,031
3,323
—
6,109
—
$ — $ — $166,030
— 276,501
—
84,457
— 310,165
— 128,961
—
—
—
—
—
—
186
Financial Assets:
December 31, 2013
Carrying
Value
Fair
Value
Level 1
(In thousands)
Level 2
Level 3
Cash and due from banks . . . . . . . . . . . . . . . . . . $ 82,013 $ 82,013 $82,013 $ — $
Available for sale securities . . . . . . . . . . . . . . . . .
Held to maturity securities . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . .
Loans receivable, net
. . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . .
FHLB stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
— 28,597
—
— 13,815
—
100
—
— 623,876
—
2,360
—
—
4,834
—
—
28,597
13,816
100
621,830
2,360
4,834
28,597
13,815
100
623,876
2,360
4,834
Financial Liabilities:
Demand deposits . . . . . . . . . . . . . . . . . . . . . . . . $118,618 $118,618 $ — $ — $118,618
— 238,231
NOW and money market . . . . . . . . . . . . . . . . . .
— 107,692
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— 197,762
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . .
— 43,902
Advances from the FHLB . . . . . . . . . . . . . . . . . .
238,231
107,692
197,004
44,000
238,231
107,692
197,762
43,902
—
—
—
—
The following methods and assumptions were used by management in estimating the fair value of its
financial instruments:
Cash and due from banks and accrued interest receivable: The carrying amount is a reasonable
estimate of fair value.
Investment securities: Fair values are based on quoted market prices or dealer quotes, if available. If a
quoted market price is not available, fair value is estimated using quoted market prices for similar
securities.
121
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FHLB stock: The carrying value of FHLB stock approximates fair value based on the most recent
redemption provisions of the FHLB.
Loans held for sale: The fair value is based upon prevailing market prices.
Loans receivable: For variable rate loans which reprice frequently and have no significant change in
credit risk, fair values are based on carrying values. The fair value of fixed rate loans are estimated by
discounting the future cash flows using the year end rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
Derivative asset (liability): The valuation of the Company’s interest rate swap is obtained from a
third-party pricing service and is determined using a discounted cash flow analysis on the expected
cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual
terms of the derivatives, including the period to maturity and interest rate curves.
Deposits: The fair value of demand deposits, regular savings and certain money market deposits is
the amount payable on demand at the reporting date. The fair value of certificates of deposit and other
time deposits is estimated using a discounted cash flow calculation that applies interest rates currently
being offered for deposits of similar remaining maturities to a schedule of aggregated expected
maturities on such deposits.
Advances from the FHLB: The fair value of the advances is estimated using a discounted cash flow
calculation that applies current FHLB interest rates for advances of similar maturity to a schedule of
maturities of such advances.
19. Fair Value Measurements
The Company is required to account for certain assets at fair value on a recurring or non-recurring
basis. As discussed in Note 1, the Company determines fair value in accordance with GAAP, which defines
fair value and establishes a framework for measuring fair value. Fair value is defined as the exchange price
that would be received for an asset or paid to transfer a liability (exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants on the
measurement date. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard
describes three levels of inputs that may be used to measure fair values:
Level 1 — Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity
has the ability to access as of the measurement date.
Level 2 — Significant other observable inputs other than Level 1 prices such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data.
Level 3 — Significant unobservable inputs that reflect a company’s own assumptions about the
assumptions that market participants would use in pricing an asset or liability.
Valuation techniques based on unobservable inputs are highly subjective and require judgments
regarding significant matters such as the amount and timing of future cash flows and the selection of
discount rates that may appropriately reflect market and credit risks. Changes in these judgments often have
a material impact on the fair value estimates. In addition, since these estimates are as of a specific point in
time they are susceptible to material near-term changes.
122
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Assets and Liabilities measured at fair value on a recurring basis
The following tables detail the financial instruments carried at fair value on a recurring basis at
December 31, 2014 and 2013, and indicates the fair value hierarchy of the valuation techniques utilized by
the Company to determine the fair value. The Company had no transfers into or out of Levels 1, 2 or 3
during the years ended December 31, 2014 and 2013.
Fair Value
Level 1
Level 2
Level 3
(In thousands)
December 31, 2014:
Available-for-sale investment securities:
U.S. Government and agency obligations . . . . . . . . . .
$—
$24,418
$—
State agency and municipal obligations . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage backed securities . . . . . . . . . . . . . . . . . . . .
Derivative Liability . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2013:
Available-for-sale investment securities:
U.S. Government and agency obligations . . . . . . . . . .
State agency and municipal obligations . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage backed securities . . . . . . . . . . . . . . . . . . . .
—
—
—
—
$—
—
—
—
18,584
16,325
5,682
(186)
$ 5,688
12,132
9,556
1,211
—
—
—
—
$—
—
—
—
Available for sale investment securities: The fair value of the Company’s investment securities are
estimated by using pricing models or quoted prices of securities with similar characteristics (i.e. matrix
pricing) and are classified within Level 2 of the valuation hierarchy.
Derivative liabilities: The Company’s derivative liabilities consist of an interest rate swap initiated in
February 2014 and an interest rate swap initiated in December 2014 as part of management’s strategy to
manage interest rate risk. The valuation of the Company’s interest rate swaps are obtained from a
third-party pricing service and is determined using a discounted cash flow analysis on the expected cash
flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the
derivatives, including the period to maturity and interest rate curves. The Company has determined that the
majority of the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy.
Financial instruments measured at fair value on a nonrecurring basis
accepted
Certain assets and liabilities are measured at fair value on a non-recurring basis in accordance with
generally
at
the-lower-of-cost-or-market that were recognized at fair value below cost at the end of the period as well as
assets that are not measured at fair value on an ongoing basis but are subject to fair value adjustments in
certain circumstances, such as when there is evidence of impairment.
principles. These
are measured
accounting
include
assets
that
123
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table details the financial instruments carried at fair value on a nonrecurring basis at
December 31, 2014 and 2013, and indicates the fair value hierarchy of the valuation techniques utilized by
the Company to determine the fair value:
December 31, 2014:
Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreclosed real estate . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2013:
Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreclosed real estate . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair Value
Level 1
Level 2
Level 3
(In thousands)
$—
—
$—
—
$—
—
$—
—
$8,281
950
$3,723
829
The following table presents information about quantitative inputs and assumptions for Level 3
financial instruments carried at fair value on a nonrecurring basis at December 31, 2014 and 2013:
Fair
Value
Valuation
Methodology
Unobservable
Input
Range
(Weighted Average)
(Dollars in thousands)
December 31, 2013:
Impaired loans
. . . . . . $8,281 Appraisals
Discount for dated appraisals
Discounted cash flows Discount rate
—
3.25% to 8.25%
Foreclosed real estate . . $ 950 Appraisals
Discount for dated appraisals 7.34% to 66.6%
December 31, 2013:
Impaired loans
. . . . . . $3,723 Appraisals
Discount for dated appraisals
Discounted cash flows Discount rate
0% to 20.0%
6.0%
Foreclosed real estate . . $ 829 Appraisals
Discount for dated appraisals 34.8% to 66.6%
Impaired loans: Loans are generally not recorded at fair value on a recurring basis. Periodically, the
loans based on fair value
Company records nonrecurring adjustments to the carrying value of
those loans. Nonrecurring
measurements for partial charge-offs of
the uncollectible portions of
loans calculated in
adjustments also include certain impairment amounts for collateral-dependent
accordance with ASC 310-10 when establishing the allowance for credit losses. Such amounts are generally
based on the fair value of the underlying collateral supporting the loan. Collateral is typically valued using
appraisals or other indications of value based on recent comparable sales of similar properties or other
assumptions. Estimates of fair value based on collateral are generally based on assumptions not observable
in the marketplace and therefore such valuations have been classified as Level 3. For those loans where the
primary source of repayment is cash flow from operations, adjustments include impairment amounts
calculated based on the perceived collectability of interest payments on the basis of a discounted cash flow
analysis utilizing a discount rate equivalent to the original note rate.
Foreclosed real estate: The Company classifies property acquired through foreclosure or acceptance
of deed-in-lieu of foreclosure as foreclosed real estate and repossessed assets in its financial statements.
Upon foreclosure, the property securing the loan is written down to fair value less selling costs. The
write-down is based upon differences between the appraised value and the book value. Appraisals are based
on observable market data such as comparable sales, however assumptions made in determining
comparability are unobservable and therefore these assets are classified as Level 3 within the valuation
hierarchy
124
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
20. Regulatory Matters
The Bank and Company are subject to various regulatory capital requirements administered by federal
and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory
and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material
effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank and
Company to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets and
of Tier I capital to average assets, as defined by regulation. Management believes, as of December 31, 2014,
the Bank and Company meet all capital adequacy requirements to which they are subject. As of
December 31, 2014, the Bank was well capitalized under the regulatory framework for prompt corrective
action, as shown in the following schedules. There are no conditions or events since then that management
believes have changed this category.
The capital amounts and ratios for the Bank and Company at December 31, 2014 and 2013, were as
follows:
Bankwell Bank
December 31, 2014
Total Capital to Risk-Weighted Assets . . . . . . .
Tier I Capital to Risk-Weighted Assets . . . . . . .
. . . . . . . . . . .
Tier I Capital to Average Assets
Bankwell Financial Group, Inc.
December 31, 2014
Total Capital to Risk-Weighted Assets . . . . . . .
Tier I Capital to Risk-Weighted Assets . . . . . . .
. . . . . . . . . . .
Tier I Capital to Average Assets
Actual Capital
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
(Dollars in thousands)
To be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
$125,339
115,359
115,359
13.55% $74,003
12.47% 37,001
11.12% 41,485
8.00% $92,503
4.00% 55,502
4.00% 51,856
10.00%
6.00%
5.00%
$135,223
125,243
125,243
14.59% $74,136
13.51% 37,068
11.78% 42,516
8.00%
4.00%
4.00%
N/A N/A
N/A N/A
N/A N/A
Actual Capital
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
(Dollars in thousands)
To be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
Bankwell Bank
December 31, 2013
Total Capital to Risk-Weighted Assets . . . . . . . .
. . . . . . .
Tier I Capital to Risk-Weighted Assets
Tier I Capital to Average Assets . . . . . . . . . . . .
Bankwell Financial Group, Inc.
December 31, 2013
Total Capital to Risk-Weighted Assets . . . . . . . .
Tier I Capital to Risk-Weighted Assets
. . . . . . .
Tier I Capital to Average Assets . . . . . . . . . . . .
$66,674
58,908
58,908
10.74% $49,682
9.49% 24,841
7.91% 29,772
8.00% $62,103
4.00% 37,262
4.00% 37,215
10.00%
6.00%
5.00%
$76,537
68,766
68,766
12.32% $49,683
11.07% 24,841
9.15% 30,068
8.00%
4.00%
4.00%
N/A N/A
N/A N/A
N/A N/A
125
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In July 2013, the Federal Reserve Board, Office of the Comptroller of the Currency and Federal
Deposit Insurance Corporation approved final rules to implement the Basel III Capital Framework (Basel
III). Basel III will be effective for the Company on January 1, 2015 and phased-in over a multiple year
period becoming fully effective on January 1, 2019. Basel III calls for higher quality capital with higher
minimum capital level requirements. Consistent with the International Basel Framework, Basel III includes
a new minimum ratio of Common Equity Tier I capital to Risk-weighted Assets of 4.5 percent, and a
Common Equity Tier I capital conservation buffer of 2.5 percent of risk-weighted assets. Basel III also
raises the minimum ratio of Tier I Capital to Risk-weighted Assets from 4.0 percent to 6.0 percent and
includes a minimum Leverage Ratio of 4.0 percent. The Company expects to meet all minimum Basel III
capital requirements under the final rule when it becomes effective.
Regulatory Restrictions on dividends
The ability of the Company to pay dividends depends, in part, on the ability of the Bank to pay
dividends to the Company. In accordance with State of Connecticut Banking Rules and Regulations,
regulatory approval is required to pay dividends in excess of the Bank’s earnings retained in the current year
plus retained earnings from the previous two years. The Bank is also prohibited from paying dividends that
would reduce its capital ratios below minimum regulatory requirements.
21. Related Party Transactions
In the normal course of business, the Company may grant loans to executive officers, directors and
members of their immediate families, as defined, and to entities in which these individuals have more than a
10% equity ownership. Such loans are transacted at terms including interest rates, similar to those available
to unrelated customers. Changes in loans outstanding to such related parties during the years ending
December 31, 2014, 2013 and 2012 were as follows:
December 31,
2014
2013
2012
(In thousands)
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . .
Additional loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
Repayments and changes in status
$7,346
6,606
(6,443)
$ 5,260
13,775
(11,689)
$ 5,098
3,769
(3,607)
Balance, end of year
. . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,509
$ 7,346
$ 5,260
Related party deposits aggregated approximately $34.5 million, $44.7 million, and $27.0 million at
December 31, 2014, 2013, and 2012, respectively.
During the years ended December 31, 2014, 2013 and 2012, the Company paid approximately $62
thousand, $862 thousand and $123 thousand, respectively, to related parties for services provided to the
Company. The payments were primarily for consulting and legal services.
22. Parent Corporation Only Financial Statements
The Parent Company operates its wholly-owned subsidiary, Bankwell Bank. The earnings of this
subsidiary are recognized by the Company using the equity method of accounting. Accordingly, earnings
are recorded as increases in the Company’s investment in the subsidiary and dividends paid reduce the
investment in the subsidiary.
126
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Condensed financial statements of the Parent Company only are as follows:
Condensed Statements of Financial Condition
December 31,
2014
2013
(Dollars in Thousands)
ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
6,640
$ 7,962
Investment in subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
119,326
59,627
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
204
3,256
1,644
289
2,410
416
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$131,070
$70,704
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accrued expenses and other liabilities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,860
129,210
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$131,070
$ 1,219
69,485
$70,704
Condensed Statements of Income
Year Ended December 31,
2014
2013
2012
(Dollars in Thousands)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
45
—
Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss before equity in undistributed earnings of subsidiaries . . . . . . .
Equity in undistributed earnings of subsidiaries . . . . . . . . . . . . . . . .
45
1,728
(1,683)
6,251
$
26
4,167
4,193
5,711
(1,518)
6,679
$
15
2,264
2,279
4,261
(1,982)
3,196
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,568
$ 5,161
$ 1,214
127
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Condensed Statements of Cash Flows
For the Years Ended December 31,
2014
2013
2012
(Dollars in Thousands)
Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,568
$ 5,161
$ 1,214
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings . . . . . . . . . . . . . . . . . . . . . . .
Increase in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease) Increase in premises and equipment, net . . . . . . . . . .
Increase in deferred income taxes, net
. . . . . . . . . . . . . . . . . . .
Increase in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . .
(6,251)
(1,245)
85
(846)
641
573
(6,679)
(3,196)
(97)
6
(452)
491
259
(203)
(283)
(1,508)
234
481
Net cash used by operating activities . . . . . . . . . . . . . . . . . . .
(2,475)
(1,311)
(3,261)
Cash flows from investing activities
Cash paid for acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital contribution to Bankwell Bank . . . . . . . . . . . . . . . . . . . .
(3,648)
(40,000)
Net cash used by investing activities . . . . . . . . . . . . . . . . . . . .
(43,648)
Cash flows from financing activities
Proceeds from exercise of options . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid on preferred stock . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from stock offering . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . . . .
207
(110)
44,704
44,801
(5,035)
—
(5,035)
467
(111)
13,178
13,534
—
—
—
—
(132)
—
(132)
Net (decrease) increase in cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,322)
7,188
(3,393)
Cash and cash equivalents:
Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,962
774
4,167
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6,640
$ 7,962
$
774
Supplemental disclosures of cash flows information:
Cash paid for:
Interest
Income taxes
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
— $ —
—
—
$ —
—
128
BANKWELL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
23. Quarterly Financial Information of Bankwell Financial Group, Inc. (Unaudited)
The following table presents selected quarterly financial information (unaudited):
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
2014
Total interest income . . . . . . . . . . . . . . . . . . . .
$11,016
Total interest expense . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . .
Non-interest income . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . .
Provision from income taxes . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to common stockholders
Earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
1,245
9,771
1,305
833
8,344
955
228
727
698
$8,668
1,073
7,595
566
757
5,530
2,256
765
$1,491
$1,464
0.10
0.10
$ 0.22
$ 0.22
2013
$8,044
896
7,148
70
682
5,897
1,863
636
$1,227
$1,200
$ 0.23
$ 0.23
$7,861
715
7,146
211
769
6,041
1,663
540
$1,123
$1,096
$ 0.28
$ 0.28
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
Total interest income . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . .
$7,394
794
Net interest income . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . .
Non-interest income . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . .
Provision (benefit) from income taxes . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to common stockholders
6,600
96
1,832
7,060
1,276
(86)
$1,362
$1,334
Earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.34
$ 0.34
$7,121
727
6,394
47
1,083
5,331
2,099
780
$1,319
$1,290
$ 0.38
$ 0.37
$6,901
653
6,248
252
1,524
5,131
2,389
921
$1,468
$1,441
$ 0.43
$ 0.42
$6,676
591
6,085
190
284
4,598
1,581
569
$1,012
$ 985
$ 0.31
$ 0.30
129
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9a. Controls and Procedures
Evaluation of disclosure controls and procedures. As of the end of the period covered by this Annual
Report on Form 10-K, the Company carried out an evaluation, under the supervision and with the
participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of its disclosure controls and procedures. In designing and
evaluating the disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving
the desired control objectives, and management was required to apply judgment in evaluating its controls
and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial
Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, were effective as of the end of the period covered by this report.
Changes in internal control over financial reporting. There were no changes in the Company’s internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that
occurred during the year ended December 31, 2014, that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial reporting.
This Annual Report on Form 10-K does not include a report on management’s assessment regarding
internal control over financial reporting or an attestation report of the Company’s registered public
accounting firm due to a transition period established by rules of the Securities and Exchange Commission
for newly public companies.
Item 9b. Other Information
None.
130
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The Company responds to this item by incorporating herein by reference the material responsive to
such item in the Company’s definitive proxy statement for its 2015 Annual Meeting of Stockholders, to be
filed with the Commission no later than April 30, 2015.
Item 11.
Executive Compensation
The Company responds to this item by incorporating herein by reference the material responsive to
such item in the Company’s definitive proxy statement for its 2015 Annual Meeting of Stockholders, to be
filed with the Commission no later than April 30, 2015.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The Company responds to this item by incorporating herein by reference the material responsive to
such item in the Company’s definitive proxy statement for its 2015 Annual Meeting of Stockholders, to be
filed with the Commission no later than April 30, 2015.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The Company responds to this item by incorporating herein by reference the material responsive to
such item in the Company’s definitive proxy statement for its 2015 Annual Meeting of Stockholders, to be
filed with the Commission no later than April 30, 2015.
Item 14.
Principal Accounting Fees and Services
The Company responds to this item by incorporating herein by reference the material responsive to
such item in the Company’s definitive proxy statement for its 2015 Annual Meeting of Stockholders, to be
filed with the Commission no later than April 30, 2015.
131
Item 15.
Exhibits, Financial Statement Schedules
PART IV
Number
Exhibit 3.1
Exhibit 3.2
Exhibit 10.1†
Exhibit 10.2†
Exhibit 10.3†
Exhibit 10.4†
Exhibit 10.5†
Exhibit 10.6†
Exhibit 10.7†
Exhibit 10.8†
Exhibit 10.9†
Exhibit 10.10†
Exhibit 10.11†
Exhibit 10.12
Exhibit 10.13
Exhibit 10.14
Exhibit 10.15
Exhibit 10.16
Exhibit 10.17
Exhibit 21.1
Exhibit 23.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32
101
EXHIBIT INDEX
Description
Certificate of Incorporation as amended to date(1)
Amended and Restated Bylaws(1)
Employment Agreement of Christopher Gruseke dated February 25, 2015
Employment Agreement of Gail E.D. Brathwaite dated April 1, 2013(1)
Employment Agreement of Ernest J. Verrico, Sr. dated April 23, 2013(1)
Employment Agreement of Heidi S. DeWyngaert dated January 30, 2013(1)
2002 Bank Management, Director and Founder Stock Option Plan(1)
2006 Bank of New Canaan Stock Option Plan(1)
2007 Bank of New Canaan Stock Option and Equity Award Plan(1)
2011 BNC Financial Group, Inc. Stock Option and Equity Award Plan(1)
2012 BNC Financial Group, Inc. Stock Plan(1)
Amendment to the 2012 BNC Financial Group, Inc. Stock Plan(1)
BNC Financial Group, Inc. and Affiliates Deferred Compensation Plan for Directors,
January 23, 2008(1)
Small Business Lending Fund Securities Purchase Agreement with the Secretary of
the Treasury dated August 4, 2011(1)
Agreement and Plan of Merger by and among BNC Financial Group, Inc., The Bank
of New Canaan and The Wilton Bank dated as of June 14, 2013(1)
Securities Purchase Agreement dated September 30, 2013(1)
Agreement and Plan of Merger by and among Bankwell Financial Group, Inc. and
Quinnipiac Bank & Trust Company dated March 31, 2014(1)
Form of Director Indemnification Agreement(2)
Form of Executive Officer Indemnification Agreement(2)
Subsidiaries of the Registrant(1)
Consent of Whittlesey & Hadley, P.C.
Certification of Christopher Gruseke Pursuant to Rule 13a-14(a)
Certification of Ernest J. Verrico, Sr. pursuant to Rule 13a-14(a)
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The following materials from Bankwell Financial Group, Inc.’s Annual Report on
Form 10-K for the period ended December 31, 2014, formatted in eXtensible Business
Reporting Language (XBRL): (i) Consolidated Statements of Financial Condition;
(ii) Consolidated Statements of Income; (iii) Consolidated statements of
Comprehensive Income; (iv) Consolidated Statements of Shareholders’ Equity;
(v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial
Statements.
† Management contract or compensatory plan or arrangement
(1) Filed as part of the Registrant’s Registration Statement on Form S-1 filed on April 4, 2014.
(2) Filed as part of the Registrant’s Amendment No. 1 to Registration Statement on Form S-1 filed on
May 5, 2014
132
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized
SIGNATURES
BANKWELL FINANCIAL GROUP, INC.
By:
/s/ Christopher Gruseke
Christopher Gruseke
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature & Title
/s/ Christopher Gruseke
Christopher Gruseke
President and Chief Executive Officer
/s/ Ernest J. Verrico, Sr.
Ernest J. Verrico, Sr.
Executive Vice President & Chief
Financial Officer
/s/ Frederick R. Afragola
Frederick R. Afragola
Director
/s/ George P. Bauer
George P. Bauer
Director
/s/ Michael Brandt
Michael Brandt
Director
/s/ Richard Castiglioni
Richard Castiglioni
Director
/s/ Eric J. Dale
Eric J. Dale
Director
/s/ Blake S. Drexler
Blake S. Drexler
Director
/s/ James A. Fieber
James A. Fieber
Director
/s/ William J. Fitzpatrick III
William J. Fitzpatrick III
Director
133
Date
March 16, 2015
March 16, 2015
March 16, 2015
March 16, 2015
March 16, 2015
March 16, 2015
March 16, 2015
March 16, 2015
March 16, 2015
March 16, 2015
Signature & Title
/s/ Daniel S. Jones
Daniel S. Jones
Director
/s/ Carl R. Kuehner III
Carl R. Kuehner III
Director
/s/ Todd Lampert
Todd Lampert
Director
/s/ Victor S. Liss
Victor S. Liss
Director
/s/ Raymond W. Palumbo
Raymond W. Palumbo
Director
Date
March 16, 2015
March 16, 2015
March 16, 2015
March 16, 2015
March 16, 2015
134
Bankwell Financial Group is the bank holding company of its wholly owned subsidiary,
Bankwell Bank. Bankwell is a community bank with 9 branches and a loan production office
that serves the banking and lending needs of residents and businesses throughout Connecti-
cut. We pride ourselves on our unique ability to provide customers with a hometown, private
banking experience, and the products and technology that meet their everyday needs. Our
mission remains the same after 12 years: to provide outstanding personal service and add
value to each of the communities we serve.
Assets (in thousands)
Bank well throug h the y ears
$1,099,531
$779,618
$190,906
$247,041
$395,708
$0
2002
2007
2008
2010
2013
2014
Founded the
hometown bank,
The Bank of
New Canaan
Holding Company
formed (BNC
Financial Group)
A second
hometown bank,
The Bank of
Fairfield, is founded
A third hometown bank,
Stamford First Bank,
is founded (as a division
of The Bank of New
Canaan)
The Banks merge
into “Bankwell”
Bankwell acquires
The Wilton Bank
Bankwell acquires
Quinnipiac Bank &
Trust Company
CORP ORATE INFORMATION
Shareholders
For help in transferring ownership, address changes, or lost or stolen stock certificates, please contact:
Computershare
480 Washington Blvd. 29th Floor
Jersey City, NJ 07310
(800) 368-5948
www.computershare.com
Stock Symbols
BWFG – Common Stock
Stock Quotes
www.nasdaq.com
Shareholder Contact
Bankwell Financial Group, Inc.
Mr. Christopher Gruseke or Mr. Ernest J. Verrico, Sr.
220 Elm Street
New Canaan, CT 06840
(203) 652-0166
Auditors
Whittlesey & Hadley, P.C.
280 Trumbull Street, 24th Floor, Hartford, CT 06103
Corporate Counsel
Hinkley, Allen & Snyder, LLP
20 Church Street, Hartford, CT 06103
Elm Street Branch
208 Elm Street
New Canaan, CT 06840
(203) 972-3838
Sasco Hill Branch
One Sasco Hill
Fairfield, CT 06824
(203) 659-7600
Hamden Branch
2704 Dixwell Avenue
Hamden, CT 06518
(203) 407-0756
Executive Office
220 Elm Street
New Canaan, CT 06840
(203) 652-0166
Locations
Cherry Street Branch
156 Cherry Street
New Canaan, CT 06840
(203) 966-7080
Black Rock Branch
2220 Black Rock Turnpike
Fairfield, CT 06825
(203) 659-7610
Wilton Branch
47 Old Ridgefield Road
Wilton, CT 06897
(203) 762-2265
Loan Production Office
855 Main Street, Suite 700
Bridgeport, CT 06604
(203) 683-6363
Stamford Branch
612 Bedford Street
Stamford, CT 06901
(203) 391-5777
North Haven Branch
24 Washington Avenue
North Haven, CT 06473
(475) 238-6807
Norwalk Branch
370 Westport Avenue
Norwalk, CT 06851
(203) 663-0480
This annual report may include forward-looking statements by the Company that are within the protection of the Private Securities Litigation Reform Act of 1995. Such statements are
based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties that could cause our actual results to differ materially from
those set forth in such forward-looking statements. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Words such as
“believes,” “anticipates,” “expects,” “intends,” “plans,” “estimates,” “targeted” and similar expressions, and future or conditional verbs, such as “will,” “would,” “should,” “could” or “may”
are intended to identify forward-looking statements but are not the only means to identify these statements. Factors that could cause differences in actual results may be beyond our
control —Any forward-looking statements made by or on behalf of us in this report speak only as of its date, and we do not undertake to update forward-looking statements to reflect
the impact of circumstances or events that arise after that date.
Annual Report 2014
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Bank smart.
Bank local.
Bank well.
220 Elm Street, New Canaan, CT 06840
Bankwell is a member of the FDIC and an Equal Housing Lender. This statement has not been
reviewed for accuracy or relevance by the Federal Deposit Insurance Corporation.