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Bankwell Financial Group, Inc. (BWFG) SEC Filing 10-Q Quarterly report for the period ending Tuesday, March 31, 2020

SEC Filings

BWFG Quarterly Reports

Bankwell Financial Group, Inc.

CIK: 1505732 Ticker: BWFG
BANKWELL FINANCIAL GROUP REPORTS OPERATING RESULTS FOR THE FIRST QUARTER, RESERVE BUILD AND MAINTAINS QUARTERLY DIVIDEND
New Canaan, CT – April 29, 2020
– Bankwell Financial Group, Inc. (NASDAQ: BWFG) reported GAAP net income of $1.4 million, or $0.17 per share, for the first quarter of 2020, versus $5.1 million, or $0.65 per share, for the same period in 2019. The decline in net income is largely driven by an increase in the loan loss provision relating to potential exposure to the coronavirus (COVID-19) pandemic.
The Company's Board of Directors declared a $0.14 per share cash dividend, payable May 28, 2020 to shareholders of record on May 18, 2020.
Please reference the First Quarter 2020 Investor Presentation located at http://investor.mybankwell.com/Presentations for further details regarding the impact of the COVID-19 pandemic on our operations and financial results.
Notes Bankwell Financial Group President and CEO, Christopher R. Gruseke:

"While we take this opportunity to announce our quarterly earnings, we are mindful of the COVID-19 plight which is besieging society, leaving no one unaffected. We are thankful for the dedication of health care workers and first responders, as well as the essential workers who are keeping our communities running."

"As a result of our first-rate preparedness, all of our non-branch personnel have been working remotely since mid-March with complete effectiveness. I have been inspired by the efforts and dedication of Bankwell’s team as they have worked tirelessly to service our customers and communities. This was particularly true as they worked around the clock to process approximately $60 million in PPP loans for our small businesses so in need of these funds."

"The economic road ahead will challenge all businesses, but Bankwell’s strong capital base, excellent credit culture, and amazing people put us on excellent footing to overcome adversity."
First Quarter 2020 Highlights:
The allowance for loan losses was $16.7 million and represents 1.03% of total loans as of March 31, 2020, compared to an allowance for loan losses of $13.5 million, representing 0.84% of total loans as of December 31, 2019. The increase in the allowance for loan losses is primarily attributable to $3.0 million in incremental loan loss reserves recognized in the first quarter of 2020 relating to potential exposure to the COVID-19 pandemic.
Reduced rates on approximately $0.5 billion of non-maturity deposit products by an average of approximately 70 basis points during the quarter ended March 31, 2020. We expect these rate reductions to drive lower deposit costs for the remainder of the year.
Tax equivalent net interest margin was 2.98% for the quarter ended March 31, 2020, representing a 6 basis point increase compared to the quarter ended December 31, 2019.
The Company repurchased 58,499 shares of common stock at an average price of $17.69 per share, during the quarter ended March 31, 2020.
Total deposits were $1.68 billion at March 31, 2020 compared to $1.49 billion at December 31, 2019, primarily reflecting increases in brokered deposits to increase on-balance sheet liquidity.
The loan-to-deposit ratio was 96.1% at March 31, 2020, reflecting the above-mentioned increase in brokered deposits.
Total gross loans were $1.62 billion at March 31, 2020, and grew by $16.5 million during the quarter.
Investment securities totaled $100.9 million and represent 5% of total assets.
Total noninterest income was $1.1 million for the quarter ended March 31, 2020, or 7% of total revenue.
The tangible common equity ratio and tangible book value per share, as of March 31, 2020, were 8.16% and $21.69, respectively. The tangible book value per share was primarily impacted by a $1.75 mark to market

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The following information was filed by Bankwell Financial Group, Inc. (BWFG) on Thursday, April 30, 2020 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-Q Quarterly Report statement of earnings and operation as management may choose to highlight particular information in the press release.


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020

or

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to________

Commission File Number: 001-36448
Bankwell Financial Group, Inc.
(Exact Name of Registrant as specified in its Charter)
Connecticut
 
20-8251355
(State or other jurisdiction of
 
(I.R.S. Employer
Incorporation or organization)
 
Identification No.)
220 Elm Street
New Canaan, Connecticut 06840
(203) 652-0166
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which
Registered

Common Stock, no par value per
share

BWFG
NASDAQ Global Market


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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). þ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
Accelerated filer þ
Non-accelerated filer ¨
Smaller reporting company þ
Emerging growth company ¨   
 


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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

As of April 30, 2020, there were 7,871,419 shares of the registrant’s common stock outstanding.
 

2



Bankwell Financial Group, Inc.
Form 10-Q

Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certifications
 

3



PART 1 – FINANCIAL INFORMATION
Item 1. Financial Statements
Bankwell Financial Group, Inc.
Consolidated Balance Sheets - (unaudited)
(In thousands, except share data)
 
March 31, 2020
 
December 31, 2019
ASSETS
 
 
 
Cash and due from banks
$
203,569

 
$
78,051

Federal funds sold
6,427

 

Cash and cash equivalents
209,996

 
78,051

 
 
 
 
Investment securities
 
 
 
Marketable equity securities, at fair value
2,289

 
2,118

Available for sale investment securities, at fair value
82,342

 
82,439

Held to maturity investment securities, at amortized cost (fair values of $18,771 and $18,307 at March 31, 2020 and December 31, 2019, respectively)
16,252

 
16,308

Total investment securities
100,883

 
100,865

 
 
 
 
Loans receivable (net of allowance for loan losses of $16,686 at March 31, 2020 and $13,509 at December 31, 2019)
1,602,146

 
1,588,840

Accrued interest receivable
5,867

 
5,959

Federal Home Loan Bank stock, at cost
6,507

 
7,475

Premises and equipment, net
27,835

 
28,522

Bank-owned life insurance
41,926

 
41,683

Goodwill
2,589

 
2,589

Other intangible assets
196

 
214

Deferred income taxes, net
10,009

 
5,788

Other assets
45,671

 
22,196

Total assets
$
2,053,625

 
$
1,882,182

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Liabilities
 
 
 
Deposits
 
 
 
Noninterest bearing deposits
$
168,448

 
$
191,518

Interest bearing deposits
1,512,684

 
1,300,385

Total deposits
1,681,132

 
1,491,903

 
 
 
 
Advances from the Federal Home Loan Bank
125,000

 
150,000

Subordinated debentures ($25,500 face, less unamortized debt issuance costs of $280 and $293 at March 31, 2020 and December 31, 2019, respectively)
25,220

 
25,207

Accrued expenses and other liabilities
52,059

 
32,675

Total liabilities
1,883,411

 
1,699,785

Commitments and contingencies


 


Shareholders' equity
 
 
 
Common stock, no par value; 10,000,000 shares authorized, 7,871,419 and 7,868,803 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively
119,953

 
120,589

Retained earnings
69,595

 
69,324

Accumulated other comprehensive loss
(19,334
)
 
(7,516
)
Total shareholders' equity
170,214

 
182,397

 
 
 
 
Total liabilities and shareholders' equity
$
2,053,625

 
$
1,882,182


See accompanying notes to consolidated financial statements (unaudited)

4



Bankwell Financial Group, Inc.
Consolidated Statements of Income – (unaudited)
(In thousands, except share data)
 
Three Months Ended March 31,
 
2020
 
2019
Interest and dividend income
 
 
 
Interest and fees on loans
$
18,985

 
$
20,096

Interest and dividends on securities
825

 
997

Interest on cash and cash equivalents
286

 
383

Total interest and dividend income
20,096

 
21,476

 
 
 
 
Interest expense
 
 
 
Interest expense on deposits
5,709

 
6,100

Interest expense on borrowings
1,101

 
1,103

Total interest expense
6,810

 
7,203

 
 
 
 
Net interest income
13,286

 
14,273

 
 
 
 
Provision for loan losses
3,185

 
195

 
 
 
 
Net interest income after provision for loan losses
10,101

 
14,078

 
 
 
 
Noninterest income
 
 
 
Bank owned life insurance
243

 
249

Service charges and fees
217

 
249

Gains and fees from sales of loans

 
89

Other
612

 
721

Total noninterest income
1,072

 
1,308

 
 
 
 
Noninterest expense
 
 
 
Salaries and employee benefits
5,380

 
4,836

Occupancy and equipment
1,909

 
1,887

Professional services
711

 
590

Data processing
536

 
512

Director fees
295

 
189

Marketing
162

 
193

FDIC insurance
70

 
123

Amortization of intangibles
18

 
19

Other
578

 
626

Total noninterest expense
9,659

 
8,975

Income before income tax expense
1,514

 
6,411

Income tax expense
151

 
1,331

Net income
$
1,363

 
$
5,080

 
 
 
 
Earnings Per Common Share:
 
 
 
Basic
$
0.17

 
$
0.65

Diluted
$
0.17

 
$
0.65

 
 
 
 
Weighted Average Common Shares Outstanding:
 
 
 
Basic
7,750,135

 
7,760,460

Diluted
7,778,762

 
7,776,378

Dividends per common share
$
0.14

 
$
0.13


See accompanying notes to consolidated financial statements (unaudited)

5



Bankwell Financial Group, Inc.
Consolidated Statements of Comprehensive (Loss) Income – (unaudited)
(In thousands)
 
Three Months Ended March 31,
 
2020
 
2019
Net income
$
1,363

 
$
5,080

Other comprehensive (loss) income:
 
 
 
Unrealized gains on securities:
 
 
 
Unrealized holding gains on available for sale securities
2,224

 
1,392

Net change in unrealized gains
2,224

 
1,392

Income tax expense
(494
)
 
(294
)
Unrealized gains on securities, net of tax
1,730

 
1,098

Unrealized losses on interest rate swaps:
 
 
 
Unrealized losses on interest rate swaps
(17,426
)
 
(4,072
)
Income tax benefit
3,878

 
855

Unrealized losses on interest rate swaps, net of tax
(13,548
)
 
(3,217
)
Total other comprehensive loss, net of tax
(11,818
)
 
(2,119
)
Comprehensive (loss) income
$
(10,455
)
 
$
2,961


See accompanying notes to consolidated financial statements (unaudited)

6



Bankwell Financial Group, Inc.
Consolidated Statements of Shareholders' Equity – (unaudited)
(In thousands, except share data)

 
Number of Outstanding Shares
 
Common Stock
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total
Balance at December 31, 2019
7,868,803

 
$
120,589

 
$
69,324

 
$
(7,516
)
 
$
182,397

Net income

 

 
1,363

 

 
1,363

Other comprehensive loss, net of tax

 

 

 
(11,818
)
 
(11,818
)
Cash dividends declared ($0.14 per share)

 

 
(1,092
)
 

 
(1,092
)
Stock-based compensation expense

 
385

 

 

 
385

Forfeitures of restricted stock
(1,425
)
 

 

 

 

Issuance of restricted stock
61,040

 

 

 

 

Stock options exercised
1,500

 
16

 

 

 
16

Repurchase of common stock
(58,499
)
 
(1,037
)
 

 

 
(1,037
)
Balance at March 31, 2020
7,871,419

 
$
119,953

 
$
69,595

 
$
(19,334
)
 
$
170,214


 
Number of Outstanding Shares
 
Common Stock
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total
Balance at December 31, 2018
7,842,271

 
$
120,527

 
$
54,706

 
$
(1,037
)
 
$
174,196

Net income

 

 
5,080

 

 
5,080

Other comprehensive loss, net of tax

 

 

 
(2,119
)
 
(2,119
)
Cash dividends declared ($0.13 per share)

 

 
(1,020
)
 

 
(1,020
)
Stock-based compensation expense

 
216

 

 

 
216

ASU 2016-02 transition adjustment, net of tax

 

 
481

 

 
481

Forfeitures of restricted stock
(3,750
)
 

 

 

 

Issuance of restricted stock
34,450

 

 

 

 

Stock options exercised
500

 
7

 

 

 
7

Balance at March 31, 2019
7,873,471

 
$
120,750

 
$
59,247

 
$
(3,156
)
 
$
176,841


See accompanying notes to consolidated financial statements (unaudited)


7



Bankwell Financial Group, Inc.
Consolidated Statements of Cash Flows – (unaudited)
(In thousands)
 
Three Months Ended March 31,
 
2020
 
2019
Cash flows from operating activities
 
 
 
Net income
$
1,363

 
$
5,080

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
Net amortization (accretion) of premiums and discounts on investment securities
7

 
(17
)
Provision for loan losses
3,185

 
195

Credit for deferred income taxes
(866
)
 
(52
)
Change in fair value of marketable equity securities
(39
)
 
(29
)
Depreciation and amortization
830

 
842

Amortization of debt issuance costs
13

 
13

Increase in cash surrender value of bank-owned life insurance
(243
)
 
(249
)
Gains and fees from sales of loans

 
(89
)
Stock-based compensation
385

 
216

Net accretion of purchase accounting adjustments
(18
)
 
(19
)
Net change in:
 
 
 
Deferred loan fees
4

 
(109
)
Accrued interest receivable
92

 
(159
)
Other assets
(19,964
)
 
(7,461
)
Accrued expenses and other liabilities
(1,591
)
 
2,338

Net cash (used in) provided by operating activities
(16,842
)
 
500

 
 
 
 
Cash flows from investing activities
 
 
 
Proceeds from principal repayments on available for sale securities
2,312

 
2,093

Proceeds from principal repayments on held to maturity securities
58

 
62

Purchases of marketable equity securities
(132
)
 
(11
)
Purchases of available for sale securities

 
(3,961
)
Net (increase) decrease in loans
(16,495
)
 
8,080

Loan principal sold from loans not originated for sale

 
(9,858
)
Proceeds from sales of loans not originated for sale

 
9,947

Purchases of premises and equipment, net
(40
)
 
(116
)
Reduction of Federal Home Loan Bank stock
968

 
635

Net cash (used in) provided by investing activities
(13,329
)
 
6,871


See accompanying notes to consolidated financial statements (unaudited)

8



Bankwell Financial Group, Inc.
Consolidated Statements of Cash Flows - (Continued)
(In thousands)
 
Three Months Ended March 31,
 
2020
 
2019
Cash flows from financing activities
 
 
 
Net change in time certificates of deposit
$
195,674

 
$
35,025

Net change in other deposits
(6,445
)
 
(15,904
)
Net change in FHLB advances
(25,000
)
 
(10,000
)
Proceeds from exercise of options
16

 
7

Dividends paid on common stock
(1,092
)
 
(1,020
)
Repurchase of common stock
(1,037
)
 

Net cash provided by financing activities
162,116

 
8,108

Net increase in cash and cash equivalents
131,945

 
15,479

Cash and cash equivalents:
 
 
 
Beginning of year
78,051

 
78,112

End of period
$
209,996

 
$
93,591

Supplemental disclosures of cash flows information:
 
 
 
Cash paid for:
 
 
 
Interest
$
6,503

 
$
6,721

Income taxes
63

 
75

Noncash investing and financing activities:
 
 
 
Net change in unrealized gains or losses on available for sale securities
2,224

 
1,392

Net change in unrealized gains or losses on interest rate swaps
(17,426
)
 
(4,072
)
Establishment of right-of-use asset and lease liability
103

 
10,584

ASU 2016-02 transition adjustment, net of tax

 
481



See accompanying notes to consolidated financial statements (unaudited)

9




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 (collectively the Company or the Bank). In November 2013, the Bank acquired The Wilton Bank and in October 2014, the Bank acquired Quinnipiac Bank and Trust Company.

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 New York metropolitan area and throughout Connecticut, with the majority of the Company's loans in Fairfield and New Haven Counties, Connecticut, with branch locations in New Canaan, Stamford, Fairfield, Wilton, Westport, Darien, Norwalk, Hamden and North Haven Connecticut.

Principles of consolidation

The consolidated financial statements include the accounts of the Company and the Bank, including its wholly owned passive investment company subsidiary. 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, disclosures of contingent assets and liabilities as of the date of the consolidated balance sheet, and revenue and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the allowance for loan losses, the valuation of derivative instruments, investment securities valuation, evaluation of investment securities for other than temporary impairment and deferred income taxes valuation.
In March 2020, the World Health Organization declared novel coronavirus disease 2019 ("COVID-19") as a global pandemic. The COVID-19 pandemic has negatively impacted the global and U.S. economies. Many businesses in the U.S., including those in the markets we serve, were required to close, causing a significant increase in unemployment and loss of revenue for businesses that were required to close.
The consolidated financial statements reflect estimates and assumptions that affect the reported amounts of assets and liabilities, including the amount of the allowance for loan losses. The assumptions and estimates used in the financial statements were impacted by the COVID-19 pandemic. The COVID-19 pandemic did have an adverse impact on our earnings and resulted in an increase to the provision for loan losses when compared to the same period in 2019.
We are unable to estimate the full impact of COVID-19 on our business and operations at this time. The extent of such impact will depend on future developments, which are highly uncertain, including when COVID-19 can be controlled and abated and when and how the economy may be reopened. The pandemic could cause us to experience higher credit losses in our loan portfolio, impairment of our goodwill, reduced demand for our products and services, or other negative impacts on our financial position, results of operations, and prospects.

Goodwill

As a result of the economic impact and uncertainty created by the COVID-19 pandemic, the Company evaluated goodwill for impairment as of March 31, 2020 and determined there was no impairment.

Basis of consolidated financial statement presentation

The unaudited consolidated financial statements presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and Rule 10-01 of Regulation S-X and do not include all of the information and note disclosures required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for the fair presentation of the accompanying unaudited interim consolidated financial statements have been included. Interim results are not necessarily reflective of the results that may be expected for the year ending December 31, 2020. The accompanying unaudited interim consolidated financial statements should

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be read in conjunction with the audited consolidated financial statements and notes thereto included on Form 10-K for the year ended December 31, 2019.

Significant concentrations of credit risk

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

Common Share Repurchases

The Company is incorporated in the state of Connecticut. Connecticut law does not provide for treasury shares, rather shares repurchased by the Company constitute authorized, but unissued shares. GAAP states that accounting for treasury stock shall conform to state law. Therefore, the cost of shares repurchased by the Company has been allocated to common stock balances.

Reclassification

Certain prior period amounts have been reclassified to conform to the 2020 financial statement presentation. These reclassifications only changed the reporting categories and did not affect the consolidated results of operations or consolidated financial position of the Company.

Recent accounting pronouncements

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

Recently issued accounting pronouncements not yet adopted
ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments.” This ASU changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and can result in the earlier recognition of credit losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. On July 17, 2019, the FASB proposed deferring the effective date of ASC 326 for smaller reporting companies as defined by the SEC. The FASB proposed a three-year deferral for smaller reporting companies, with an effective date of January 1, 2023. On October 16, 2019, the FASB voted in favor of finalizing its proposal to defer the effective date of this standard. The FASB issued ASU No. 2019-10, which officially delayed the adoption of this standard for smaller reporting companies until fiscal years beginning after December 15, 2022. The Company does qualify to defer the adoption of this standard and has not yet adopted this standard. Management is currently working with third party consultants and continues to evaluate the impact of its future adoption of this guidance on the Company’s financial statements.

ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): “Simplifying the Test for Goodwill Impairment.” This ASU simplifies the test for goodwill impairment by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity was required to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, this ASU also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. On October 16, 2019, the FASB voted in favor of a proposal to defer the effective date of this standard in the same manner it is deferring the effective date of ASC 326. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements.


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Recently adopted accounting pronouncements
ASU No. 2018-13, Fair Value Measurement (Topic 820): “Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The following disclosure requirements were removed from topic 820 for public entities; (1) The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy (2) The policy for timing of transfers between levels and (3) The valuation processes for Level 3 fair value measurements. This update also modified and added disclosure requirements to Topic 820, including adding (1) The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and (2) The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The guidance was effective for the Company on January 1, 2020. The application of this guidance did not have a material impact on the Company's financial statements.

2. Investment Securities

The amortized cost, gross unrealized gains and losses and fair value of available for sale and held to maturity securities at March 31, 2020 were as follows:
 
March 31, 2020
 
Amortized Cost
 
Gross Unrealized
 
Fair Value
 
 
Gains
 
Losses
 
 
(In thousands)
Available for sale securities:
 
 
 
 
 
 
 
U.S. Government and agency obligations
 
 
 
 
 
 
 
Less than one year
$
2,100

 
$
7

 
$

 
$
2,107

Due from one through five years
9,957

 
301

 

 
10,258

Due from five through ten years
8,268

 
763

 

 
9,031

Due after ten years
58,617

 
2,329

 

 
60,946

 
 
 
 
 
 
 
 
Total available for sale securities
$
78,942

 
$
3,400

 
$

 
$
82,342

 
 
 
 
 
 
 
 
Held to maturity securities:
 
 
 
 
 
 
 
State agency and municipal obligations
 
 
 
 
 
 
 
Due after ten years
$
16,178

 
$
2,511

 
$

 
$
18,689

 
 
 
 
 
 
 
 
Government-sponsored mortgage backed securities
 
 
 
 
 
 
 
No contractual maturity
74

 
8

 

 
82

Total held to maturity securities
$
16,252

 
$
2,519

 
$

 
$
18,771



12



The amortized cost, gross unrealized gains and losses and fair value of available for sale and held to maturity securities at December 31, 2019 were as follows:
 
December 31, 2019
 
Amortized Cost
 
Gross Unrealized
 
Fair Value
 
 
Gains
 
Losses
 
 
(In thousands)
Available for sale securities:
 
 
 
 
 
 
 
U.S. Government and agency obligations
 
 
 
 
 
 
 
Less than one year
$
2,100

 
$

 
$
(1
)
 
$
2,099

Due from one through five years
9,950

 
81

 

 
10,031

Due from five through ten years
8,311

 
218

 
(1
)
 
8,528

Due after ten years
60,902

 
879

 

 
61,781

Total available for sale securities
$
81,263

 
$
1,178

 
$
(2
)
 
$
82,439

 
 
 
 
 
 
 
 
Held to maturity securities:
 
 
 
 
 
 
 
State agency and municipal obligations
 
 
 
 
 
 
 
Due after ten years
$
16,231

 
$
1,991

 
$

 
$
18,222

 
 
 
 
 
 
 
 
Government-sponsored mortgage backed securities
 
 
 
 
 
 
 
No contractual maturity
77

 
8

 

 
85

Total held to maturity securities
$
16,308

 
$
1,999

 
$

 
$
18,307


There were no sales of investment securities during the three months ended March 31, 2020 or 2019.

At March 31, 2020 and December 31, 2019, none of the Company's securities were pledged as collateral with the Federal Home Loan Bank ("FHLB") or any other institution.

As of March 31, 2020 and December 31, 2019, the actual duration of the Company's available for sale securities were significantly shorter than the stated maturities.

As of March 31, 2020, the Company held marketable equity securities with a fair value of $2.3 million and an amortized cost of $2.2 million. At December 31, 2019, the Company held marketable equity securities with a fair value of $2.1 million and an amortized cost of $2.0 million. These securities primarily represent an investment in mutual funds that have an objective to make investments for CRA purposes.

There were no and two investment securities as of March 31, 2020 and December 31, 2019, respectively, in which the fair value of the security was less than the amortized cost of the security.

The following table provides information regarding investment securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2019:
 
Length of Time in Continuous Unrealized Loss Position
 
 
 
 
 
 
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized
Loss
 
Percent
Decline from
Amortized Cost
 
Fair Value
 
Unrealized
Loss
 
Percent
Decline from
Amortized Cost
 
Fair Value
 
Unrealized
Loss
 
Percent
Decline from
Amortized Cost
 
(Dollars in thousands)
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and agency obligations
$
99

 
$
(1
)
 
1.01
%
 
$
998

 
$
(1
)
 
0.13
%
 
$
1,097

 
$
(2
)
 
0.21
%
Total investment securities
$
99

 
$
(1
)
 
1.01
%
 
$
998

 
$
(1
)
 
0.13
%
 
$
1,097

 
$
(2
)
 
0.21
%



13



3. Loans Receivable and Allowance for Loan Losses

The following table sets forth a summary of the loan portfolio at March 31, 2020 and December 31, 2019:
(In thousands)
March 31, 2020
 
December 31, 2019
Real estate loans:
 
 
 
Residential
$
139,353

 
$
147,109

Commercial
1,131,206

 
1,128,614

Construction
107,594

 
98,583

 
1,378,153

 
1,374,306

 
 
 
 
Commercial business
242,705

 
230,028

 
 
 
 
Consumer
113

 
150

Total loans
1,620,971

 
1,604,484

 
 
 
 
Allowance for loan losses
(16,686
)
 
(13,509
)
Deferred loan origination fees, net
(2,141
)
 
(2,137
)
Unamortized loan premiums
2

 
2

Loans receivable, net
$
1,602,146

 
$
1,588,840


Lending activities are conducted principally in the New York metropolitan area and throughout Connecticut, with the majority in Fairfield and New Haven Counties of Connecticut, and consist of commercial real estate loans, commercial business loans and, to a lesser degree, a variety of consumer loans. Loans may also be granted for the construction of commercial properties. The majority of commercial mortgage loans are collateralized by first or second mortgages on real estate.

Risk management

The Company has established credit policies applicable to each type of lending activity in which it engages. The Company evaluates the creditworthiness of each customer and extends credit of up to 80% of the market value of the collateral, depending on the borrower's creditworthiness and the type of collateral. The borrower’s ability to service the debt is monitored on an ongoing basis. Real estate is the primary form of collateral. Other important forms of collateral are business assets, time deposits and marketable securities. While collateral provides assurance as a secondary source of repayment, the Company ordinarily requires the primary source of repayment for commercial loans to be based on the borrower’s ability to generate continuing cash flows. In the fourth quarter of 2017, management made the strategic decision to cease the origination of residential mortgage loans. At the beginning of the third quarter 2019, the Company no longer offered home equity loans or lines of credit. The Company’s policy for residential lending generally required that the amount of the loan may not exceed 80% of the original appraised value of the property. In certain situations, the amount may have exceeded 80% LTV either with private mortgage insurance being required for that portion of the residential loan in excess of 80% of the appraised value of the property or where secondary financing is provided by a housing authority program second mortgage, a community’s low/moderate income housing program, or a religious or civic organization.

Credit quality of loans and the allowance for loan losses

Management segregates the loan portfolio into defined segments, which are used to develop and document a systematic method for determining the Company's 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.


14



The Company's loan portfolio is segregated into the following portfolio segments:

Residential Real Estate: This portfolio segment consists of first mortgage loans secured by one-to-four family owner occupied residential properties for personal use located in the Company's market area. This segment also includes home equity loans and home equity lines of credit secured by owner occupied one-to-four family residential properties. Loans of this type were written at a combined maximum of 80% of the appraised value of the property and the Company requires a first or second lien position on the property. These loans can be affected by economic conditions and the values of the underlying properties.

Commercial Real Estate: This portfolio segment includes loans secured by commercial real estate, multi-family dwellings and investor-owned one-to-four family dwellings. 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 apartment buildings and condominiums, as well as office buildings, retail and other income producing properties and land loans, which are loans made with land as collateral. Construction and land development financing generally involves greater credit risk than long-term financing on improved, owner-occupied or leased real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, the Company may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment through sale or refinance. 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 paying debt service, which exposes the Company to greater risk of non-payment and loss.

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 have increased difficulty of loan monitoring and a higher risk of default since their repayment generally depends on the successful operation of the borrower’s business.

Consumer: This portfolio segment includes loans secured by savings or certificate accounts, 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.


15



Allowance for loan losses

The following tables set forth the activity in the Company’s allowance for loan losses for the three months ended March 31, 2020 and 2019, by portfolio segment:
 
Residential Real Estate
 
Commercial Real Estate
 
Construction
 
Commercial Business
 
Consumer
 
Total
 
(In thousands)
Three Months Ended March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
730

 
$
10,551

 
$
324

 
$
1,903

 
$
1

 
$
13,509

Charge-offs

 

 

 
(8
)
 
(2
)
 
(10
)
Recoveries

 

 

 
1

 
1

 
2

Provisions
55

 
2,583

 
142

 
405

 

 
3,185

Ending balance
$
785

 
$
13,134

 
$
466

 
$
2,301

 
$

 
$
16,686


The allowance for loan losses for the three months ended March 31, 2020 totaled $16.7 million. The allowance for loan losses for the three months ended March 31, 2020 included $3.0 million in incremental loan loss reserves recognized in the first quarter of 2020. This increase in loan loss reserves is a result of management’s assessment of increased credit risk relating to economic disruption and uncertainty caused by the COVID-19 pandemic applied to the loan population that is being collectively evaluated for impairment, as opposed to the population of loans that is being individually evaluated for impairment.
 
Residential Real Estate
 
Commercial Real Estate
 
Construction
 
Commercial Business
 
Consumer
 
Total
 
(In thousands)
Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
857

 
$
11,562

 
$
140

 
$
2,902

 
$
1

 
$
15,462

Charge-offs
(233
)
 

 

 
(3
)
 
(2
)
 
(238
)
Recoveries

 

 

 
10

 
1

 
11

Provisions (Credits)
95

 
84

 
73

 
(58
)
 
1

 
195

Ending balance
$
719

 
$
11,646

 
$
213

 
$
2,851

 
$
1

 
$
15,430


Loans evaluated for impairment and the related allowance for loan losses as of March 31, 2020 and December 31, 2019 were as follows:
 
Portfolio
 
Allowance
 
(In thousands)
March 31, 2020
 
 
 
Loans individually evaluated for impairment:
 
 
 
Residential real estate
$
3,980

 
$

Commercial real estate
14,277

 
464

Commercial business
4,264

 
70

Subtotal
22,521

 
534

Loans collectively evaluated for impairment:
 
 
 
Residential real estate
135,373

 
785

Commercial real estate
1,116,929

 
12,670

Construction
107,594

 
466

Commercial business
238,441

 
2,231

Consumer
113

 

Subtotal
1,598,450

 
16,152

 
 
 
 
Total
$
1,620,971

 
$
16,686


16



 
Portfolio
 
Allowance
 
(In thousands)
December 31, 2019
 
 
 
Loans individually evaluated for impairment:
 
 
 
Residential real estate
$
4,020

 
$

Commercial real estate
14,203

 
372

Commercial business
4,330

 
134

Subtotal
22,553

 
506

Loans collectively evaluated for impairment:
 
 
 
Residential real estate
143,089

 
730

Commercial real estate
1,114,411

 
10,179

Construction
98,583

 
324

Commercial business
225,698

 
1,769

Consumer
150

 
1

Subtotal
1,581,931

 
13,003

 
 
 
 
Total
$
1,604,484

 
$
13,509


Credit quality indicators

To measure credit risk for the loan portfolios, the Company employs a credit risk rating system. This risk rating represents an assessed level of a loan’s risk based on the character and creditworthiness of the borrower/guarantor, the capacity of the borrower to adequately service the debt, any credit enhancements or additional sources of repayment, and the quality, value and coverage of the collateral, if any.

The objectives of the Company’s risk rating system are to provide the Board of Directors and senior management with an objective assessment of the overall quality of the loan portfolio, to promptly and accurately identify loans with well-defined credit weaknesses so that timely action can be taken to minimize a potential credit loss, to identify relevant trends affecting the collectability of the loan portfolio, to isolate potential problem areas and to provide essential information for determining the adequacy of the allowance for loan losses. The Company’s credit risk rating system has nine grades, with each grade corresponding to a progressively greater risk of default. Risk ratings of (1) through (5) are "pass" categories and risk ratings of (6) through (9) are criticized asset categories as defined by the regulatory agencies.

A “special mention” (6) credit has a potential weakness which, if uncorrected, may result in a deterioration of the repayment prospects or inadequately protect the Company’s credit position at some time in the future. “Substandard” (7) loans are credits that have a well-defined weakness or weaknesses that jeopardize the full repayment of the debt. An asset rated “doubtful” (8) has all the weaknesses inherent in a substandard asset and which, in addition, make collection or liquidation in full highly questionable and improbable when considering existing facts, conditions, and values. Loans classified as “loss” (9) are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value; rather, it is not practical or desirable to defer writing-off this asset even though partial recovery may be made in the future.

Risk ratings are assigned as necessary to differentiate risk within the portfolio. They are reviewed on an ongoing basis through the annual loan review process performed by Company personnel, normal renewal activity and the quarterly watchlist and watched asset report process. They are revised to reflect changes in the borrower's financial condition and outlook, debt service coverage capability, repayment performance, collateral value and coverage, as well as other considerations. In addition to internal review at multiple points, outsourced loan review opines on risk ratings with regard to the sample of loans their review covers.


17



The following tables present credit risk ratings by loan segment as of March 31, 2020 and December 31, 2019:
 
Commercial Credit Quality Indicators
 
March 31, 2020
 
December 31, 2019
 
Commercial Real Estate
 
Construction
 
Commercial Business
 
Total
 
Commercial Real Estate
 
Construction
 
Commercial Business
 
Total
 
(In thousands)
Pass
$
1,106,734

 
$
98,597

 
$
222,035

 
$
1,427,366

 
$
1,104,164

 
$
98,583

 
$
208,932

 
$
1,411,679

Special Mention
10,195

 
8,997

 
16,407

 
35,599

 
10,247

 

 
16,766

 
27,013

Substandard
14,277

 

 
795

 
15,072

 
14,203

 

 
854

 
15,057

Doubtful

 

 
3,468

 
3,468

 

 

 
3,476

 
3,476

Loss

 

 

 

 

 

 

 

Total loans
$
1,131,206

 
$
107,594

 
$
242,705

 
$
1,481,505

 
$
1,128,614

 
$
98,583

 
$
230,028

 
$
1,457,225


 
Residential and Consumer Credit Quality Indicators
 
March 31, 2020
 
December 31, 2019
 
Residential Real Estate
 
Consumer
 
Total
 
Residential Real Estate
 
Consumer
 
Total
 
(In thousands)
Pass
$
135,372

 
$
113

 
$
135,485

 
$
143,089

 
$
150

 
$
143,239

Special Mention

 

 

 

 

 

Substandard
3,797

 

 
3,797

 
3,832

 

 
3,832

Doubtful
184

 

 
184

 
188

 

 
188

Loss

 

 

 

 

 

Total loans
$
139,353

 
$
113

 
$
139,466

 
$
147,109

 
$
150

 
$
147,259


Loan portfolio aging analysis

When a loan is 15 days past due, the Company sends the borrower a late notice. The Company attempts to 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, 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, after the 90th day of delinquency, the Company may take other appropriate legal action. A summary report of all loans 30 days or more past due is provided to the Board of Directors of the Company periodically. 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.


18



The following tables set forth certain information with respect to the Company's loan portfolio delinquencies by portfolio segment as of March 31, 2020 and December 31, 2019:
 
March 31, 2020
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or Greater Past Due
 
Total Past Due
 
Current
 
Total Loans
 
(In thousands)
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
$
112

 
$
929

 
$
93

 
$
1,134

 
$
138,219

 
$
139,353

Commercial real estate
252

 
143

 
2,872

 
3,267

 
1,127,939

 
1,131,206

Construction
6,240

 

 

 
6,240

 
101,354

 
107,594

Commercial business
185

 
325

 
3,440

 
3,950

 
238,755

 
242,705

Consumer

 

 

 

 
113

 
113

Total loans
$
6,789

 
$
1,397

 
$
6,405

 
$
14,591

 
$
1,606,380

 
$
1,620,971


 
December 31, 2019
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or Greater Past Due
 
Total Past Due
 
Current
 
Total Loans
 
(In thousands)
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
$

 
$
943

 
$
281

 
$
1,224

 
$
145,885

 
$
147,109

Commercial real estate
355

 

 
5,935

 
6,290

 
1,122,324

 
1,128,614

Construction
1,357

 

 

 
1,357

 
97,226

 
98,583

Commercial business

 

 
3,455

 
3,455

 
226,573

 
230,028

Consumer

 

 

 

 
150

 
150

Total loans
$
1,712

 
$
943

 
$
9,671

 
$
12,326

 
$
1,592,158

 
$
1,604,484


There were no loans delinquent greater than 90 days and still accruing interest as of March 31, 2020. There was one loan, totaling$3.4 million, delinquent greater than 90 days and still accruing interest as of December 31, 2019. The delinquency for that particular loan was a result of an administrative delay, as the loan had matured in 2019, as opposed to delinquent payments.

Loans on nonaccrual status

The following is a summary of nonaccrual loans by portfolio segment as of March 31, 2020 and December 31, 2019:
 
March 31, 2020
 
December 31, 2019
 
(In thousands)
Residential real estate
$
1,532

 
$
1,560

Commercial real estate
5,339

 
5,222

Commercial business
3,783

 
3,806

Total
$
10,654

 
$
10,588


Nonaccrual loans totaled $10.7 million at March 31, 2020, of which $4.6 million is guaranteed by the Small Business Administration (SBA).

Interest income on loans that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms for the three months ended March 31, 2020 and 2019 was $0.2 million and $0.3 million, respectively. There was no interest income recognized on these loans for the three months ended March 31, 2020 and March 31, 2019.


19



At March 31, 2020 and December 31, 2019, there were no commitments to lend additional funds to any borrower on nonaccrual status. Nonaccrual loans with no specific reserve totaled $9.7 million and $9.6 million at March 31, 2020 and December 31, 2019, respectively.

Impaired loans

An impaired loan is generally one for which it is probable, based on current information, that the Company will not collect all the amounts due in accordance with the contractual terms of the loan. Impaired loans are individually evaluated for impairment. When the Company classifies a problem loan as impaired, it evaluates whether a specific valuation allowance is required for that portion of the asset that is estimated to be impaired.

The following table summarizes impaired loans by portfolio segment as of March 31, 2020 and December 31, 2019:
 
Carrying Amount
 
Unpaid Principal Balance
 
Associated Allowance
 
March 31, 2020
 
December 31, 2019
 
March 31, 2020
 
December 31, 2019
 
March 31, 2020
 
December 31, 2019
 
(In thousands)
Impaired loans without a valuation allowance:
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
$
3,980

 
$
4,020

 
$
4,123

 
$
4,144

 
$

 
$

Commercial real estate
8,650

 
8,571

 
8,982

 
8,859

 

 

Commercial business
3,685

 
3,915

 
4,900

 
5,126

 

 

Total impaired loans without a valuation allowance
16,315

 
16,506

 
18,005

 
18,129

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans with a valuation allowance:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
5,627

 
$
5,632

 
$
5,641

 
$
5,647

 
$
464

 
$
372

Commercial business
579

 
415

 
581

 
417

 
70

 
134

Total impaired loans with a valuation allowance
6,206

 
6,047

 
6,222

 
6,064

 
534

 
506

Total impaired loans
$
22,521

 
$
22,553

 
$
24,227

 
$
24,193

 
$
534

 
$
506



20



The following table summarizes the average carrying amount of impaired loans and interest income recognized on impaired loans by portfolio segment for the three months ended March 31, 2020 and 2019:
 
Average Carrying Amount
 
Interest Income Recognized
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
2020
 
2019
 
2020
 
2019
 
(In thousands)
Impaired loans without a valuation allowance:
 
 
 
 
 
 
 
Residential real estate
$
3,999

 
$
6,058

 
$
31

 
$
30

Commercial real estate
8,736

 
6,012

 
70

 
4

Commercial business
3,691

 
4,843

 
3

 
76

Consumer

 
3

 

 

Total impaired loans without a valuation allowance
16,426

 
16,916

 
104

 
110

Impaired loans with a valuation allowance:
 
 
 
 
 
 
 
Residential real estate
$

 
$
108

 
$

 
$

Commercial real estate
5,629

 
323

 
31

 
1

Commercial business
591

 
1,249

 
3

 
7

Total impaired loans with a valuation allowance
6,220

 
1,680

 
34

 
8

Total impaired loans
$
22,646

 
$
18,596

 
$
138

 
$
118


Troubled debt restructurings ("TDRs")

Modifications to a loan are considered to be a troubled debt restructuring when both of the following conditions are met: 1) the borrower is experiencing financial difficulties and 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.

Loans classified as TDRs totaled $9.5 million at March 31, 2020 and $9.6 million at December 31, 2019. There were no loans modified as TDRs during the three months ended March 31, 2020 and March 31, 2019.

At March 31, 2020 and December 31, 2019, there were three nonaccrual loans identified as TDRs totaling $1.6 million and three nonaccrual loans identified as TDRs totaling $1.6 million, respectively.

There were no loans modified in a troubled debt restructuring that re-defaulted during the three months ended March 31, 2020 and March 31, 2019.

Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") permits a financial institution to elect to suspend troubled debt restructuring accounting, in certain circumstances, beginning March 1, 2020 and ending on the earlier of December 31, 2020, or sixty days after the national emergency concerning COVID-19 terminates. All short term loan modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any request for relief are not considered TDRs.

As of March 31, 2020, the Company received 190 requests for payment relief on loan balances totaling $235.5 million. The Company has thoroughly evaluated these deferral requests and if deemed appropriate, granted initial payment deferrals of no more than three months in duration, except for SBA loans which are mandated to receive an automatic six month deferral. These deferrals are not considered troubled debt restructurings based on Section 4013 of the CARES Act and interagency guidance issued in March of 2020.


21



4. Shareholders' Equity

Common Stock

The Company has 10,000,000 shares authorized and 7,871,419 shares issued and outstanding at March 31, 2020 and 10,000,000 shares authorized and 7,868,803 shares issued and outstanding at December 31, 2019. The Company's stock is traded on the NASDAQ stock market under the ticker symbol BWFG.

Warrants

In connection with a 2014 acquisition and the associated merger agreement, the Company had issued warrants convertible to shares of common stock at a pre-determined price and exchange ratio. The Company does not have any warrants outstanding as of March 31, 2020.

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.

Issuer Purchases of Equity Securities

On December 19, 2018, the Company's Board of Directors authorized a share repurchase program of up to 400,000 shares of the Company's Common Stock. The Company intends to accomplish the share repurchases through open market transactions, though the Company could accomplish repurchases through other means, such as privately negotiated transactions. The timing, price and volume of repurchases will be based on market conditions, relevant securities laws and other factors. The share repurchase plan does not obligate the Company to acquire any particular amount of Common Stock, and it may be modified or suspended at any time at the Company's discretion. During the three months ended March 31, 2020, the Company purchased 58,499 shares of its Common Stock at a weighted average price of $17.69 per share. During the year ended December 31, 2019, the Company purchased 34,168 shares of its Common Stock at a weighted average price of $28.87 per share.

5. Comprehensive Income

Comprehensive income represents the sum of net income and items of other comprehensive income or loss, including net unrealized gains or losses on securities available for sale and net unrealized gains or losses on derivatives. The Company's derivative instruments are utilized to manage economic risks, including interest rate risk. Changes in fair value of the Company's derivatives are primarily driven by changes in interest rates and recognized in other comprehensive income. The Company's current derivative positions will cause a decrease to other comprehensive income in a falling interest rate environment and an increase in a rising interest rate environment. The Company’s total comprehensive income or loss for the three months ended March 31, 2020 and 2019 is reported in the Consolidated Statements of Comprehensive Income.


22



The following tables present the changes in accumulated other comprehensive income (loss) by component, net of tax for the three months ended March 31, 2020 and 2019:

 
Net Unrealized Gain (Loss) on Available for Sale Securities
 
Net Unrealized Gain (Loss) on Interest Rate Swaps
 
Total
 
(In thousands)
Balance at December 31, 2019
$
928

 
$
(8,444
)
 
$
(7,516
)
Other comprehensive income (loss) before reclassifications, net of tax
1,730

 
(13,548
)
 
(11,818
)
Net other comprehensive income (loss)
1,730

 
(13,548
)
 
(11,818
)
Balance at March 31, 2020
$
2,658

 
$
(21,992
)
 
$
(19,334
)

 
Net Unrealized Gain (Loss) on Available for Sale Securities
 
Net Unrealized Gain (Loss) on Interest Rate Swaps
 
Total
 
(In thousands)
Balance at December 31, 2018
$
(1,379
)
 
$
342

 
$
(1,037
)
Other comprehensive income (loss) before reclassifications, net of tax
1,098

 
(3,217
)
 
(2,119
)
Net other comprehensive income (loss)
1,098

 
(3,217
)
 
(2,119
)
Balance at March 31, 2019
$
(281
)
 
$
(2,875
)
 
$
(3,156
)

There were no items reclassified from accumulated other comprehensive income or loss for the three months ended March 31, 2020 or 2019.

6. Earnings per Share ("EPS")

Unvested restricted stock awards that contain non-forfeitable rights to dividends are participating securities and are included in the computation of EPS pursuant to the two-class method. The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. The Company’s unvested restricted stock awards qualify as participating securities.

Net income is allocated between the common stock and participating securities pursuant to the two-class method. Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period, excluding participating unvested restricted stock awards.

Diluted EPS is computed in a similar manner, except that the denominator includes the number of additional common shares that would have been outstanding if potentially dilutive common shares were issued using the treasury stock method.


23



The following table is a reconciliation of earnings available to common shareholders and basic weighted average common shares outstanding to diluted weighted average common shares outstanding, reflecting the application of the two-class method:
 
Three Months Ended March 31,
 
2020
 
2019
 
(In thousands, except per share data)
Net income
$
1,363

 
$
5,080

Dividends to participating securities(1)
(17
)
 
(10
)
Undistributed earnings allocated to participating securities(1)
(4
)
 
(44
)
Net income for earnings per share calculation
$
1,342

 
$
5,026

 
 
 
 
Weighted average shares outstanding, basic
7,750

 
7,760

Effect of dilutive equity-based awards(2)
29

 
16

Weighted average shares outstanding, diluted
7,779

 
7,776

Net earnings per common share:
 
 
 
Basic earnings per common share
$
0.17

 
$
0.65

Diluted earnings per common share
$
0.17

 
$
0.65


(1)
Represents dividends paid and undistributed earnings allocated to unvested stock-based awards that contain non-forfeitable rights to dividends.
(2)
Represents the effect of the assumed exercise of stock options and the vesting of restricted shares, as applicable, utilizing the treasury stock method.

7. Regulatory Matters

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

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

The Basel III Capital Rules establish a minimum Common Equity Tier 1 capital requirement of 4.5% of risk-weighted assets; set the minimum leverage ratio at 4.0% of total assets; increased the minimum Tier 1 capital to risk-weighted assets requirement from 4.0% to 6.0%; and retained the minimum total capital to risk weighted assets requirement at 8.0%. A “well-capitalized” institution must generally