Bankwell Financial Group(BWFG) - 2020 Q4 - Annual Report

PART I Business Bankwell Financial Group, Inc. operates as a bank holding company through Bankwell Bank, primarily serving the New York metropolitan area with a focus on commercial and real estate lending General Overview Bankwell Financial Group, Inc. is a bank holding company headquartered in New Canaan, Connecticut, serving the New York metropolitan area - Bankwell Financial Group, Inc. is a bank holding company headquartered in New Canaan, Connecticut, operating through its subsidiary, Bankwell Bank[11] Financial Snapshot as of December 31, 2020 | Metric | Value (approx.) | | :--- | :--- | | Total Assets | $2.3 billion | | Net Loans | $1.6 billion | | Total Deposits | $1.8 billion | | Shareholders' Equity | $176.6 million | - The company's primary market is the New York metropolitan area, including Fairfield and New Haven Counties, Connecticut, served by a main office and ten branch offices[11] History and Growth The company has grown through strategic mergers, significantly increasing its total assets, gross loans, and deposits between 2016 and 2020 - The company has grown through mergers, including the acquisition of The Wilton Bank in 2013 and Quinnipiac Bank and Trust Company in 2014[12] Growth from Dec 31, 2016 to Dec 31, 2020 | Metric | 2016 | 2020 | | :--- | :--- | :--- | | Total Assets | $1.6 billion | ~$2.3 billion | | Gross Loans | $1.4 billion | $1.6 billion | | Deposits | $1.3 billion | ~$1.8 billion | Business Strategy and Competitive Strengths The company's strategy focuses on being a customer-centric "Hometown" bank, pursuing organic growth, strategic acquisitions, and disciplined risk management - The company's strategy is centered on being a customer-centric "Hometown" bank, pursuing organic growth complemented by strategic acquisitions, utilizing a scalable infrastructure, and maintaining a disciplined focus on risk management[13] - Key competitive strengths include its operation in the affluent New York metropolitan market, an experienced management team, a community-involved Board of Directors, a strong capital position, and a scalable technology platform[16] Lending Activities The company primarily focuses on commercial and middle-market lending, with a significant portion of its portfolio in commercial real estate loans - The primary lending focus is on commercial and middle-market businesses and not-for-profit organizations, with products including commercial real estate, commercial business, and construction loans[21] Loan Portfolio Composition (2016-2020) | Loan Type | 2020 ($M) | 2019 ($M) | 2018 ($M) | 2017 ($M) | 2016 ($M) | | :--- | :--- | :--- | :--- | :--- | :--- | | Real Estate Loans | | | | | | | Residential | 113.6 | 147.1 | 178.1 | 193.5 | 195.7 | | Commercial | 1,148.4 | 1,128.6 | 1,094.1 | 987.2 | 845.3 | | Construction | 87.0 | 98.6 | 73.2 | 101.6 | 107.4 | | Commercial Business | 276.6 | 230.0 | 259.0 | 260.0 | 215.9 | | Consumer | 0.1 | 0.2 | 0.4 | 0.6 | 1.5 | | Total Loans | 1,625.6 | 1,604.5 | 1,604.7 | 1,543.0 | 1,365.9 | - The company strategically decided to cease originating residential mortgage loans in Q4 2017 and home equity loans/lines of credit in Q3 2019[24] - Commercial business loans include Paycheck Protection Program (PPP) loans made under the CARES Act, which are fully guaranteed by the U.S. Small Business Administration (SBA)[26] Credit Policy and Risk Management The company maintains disciplined underwriting standards and a service-driven credit culture, with active portfolio monitoring and risk assessment - The company maintains disciplined underwriting standards with a tiered credit approval process, while focusing on a service-driven, relationship-based credit culture[27] - An informal internal lending limit is set at 40% of unimpaired capital and allowance for loan losses for a single relationship secured by commercial real estate, with top 20 borrowing relationships ranging from $16.4 million to $92.0 million[27] - Credit risk management involves active portfolio monitoring, annual reviews of commercial loans over $1 million, a Watch List for potential credit issues, semi-annual third-party loan reviews, and an annual stress test of the commercial loan portfolio[29] Funding and Investments Deposits are the primary source of funds, complemented by an investment portfolio for liquidity and stable income, and FHLB advances - Deposits are the primary source of funds, offering traditional products like checking, savings, money market, and certificates of deposit[31] - The investment portfolio's primary purpose is to provide liquidity, with a secondary goal of generating stable income, consisting of high-grade securities like government agency and mortgage-backed securities[30] - The company utilizes advances from the Federal Home Loan Bank of Boston (FHLB) for funding and liquidity, and has $25.5 million in subordinated notes issued in 2015, which qualify as Tier 2 capital[32][34] Supervision and Regulation The company operates in a highly regulated environment, subject to extensive state and federal banking laws, including those influenced by the Dodd-Frank Act and COVID-19 responses - The Bank is extensively regulated by the Connecticut Department of Banking and the FDIC, while the holding company is regulated by the Federal Reserve Board[36][47] - The Dodd-Frank Act and the Economic Growth Act have significantly influenced the regulatory structure, affecting capital requirements, consumer protection, and compliance costs[37][40] - In response to the COVID-19 pandemic, the company participated in the Paycheck Protection Program (PPP) under the CARES Act and followed regulatory guidance on loan modifications for affected borrowers[43] - The Bank is subject to Basel III capital rules, which establish minimum capital requirements and a capital conservation buffer that can limit dividend payments if not met[52] Taxation The company is subject to federal income tax and the Connecticut corporation business tax, with strategies to reduce state tax liability - The company is subject to federal income tax and the Connecticut corporation business tax at a rate of 7.5% for 2020 and 2019[64][65] - In 2015, the company created Bankwell Loan Servicing Group, Inc., a Passive Investment Company (PIC), which holds certain real estate loans, reducing the Bank's state tax liability through income exemption[65] Risk Factors The company faces significant business, market, operational, and regulatory risks, including economic downturns, credit portfolio vulnerabilities, geographic concentration, intense competition, and the ongoing impact of the COVID-19 pandemic - Business Risks: The company is exposed to risks from weak economic conditions, credit risk in its loan portfolio, and potential inadequacy of its allowance for loan losses, with concentrations of large loans and a focus on commercial real estate lending increasing this risk[68][69][71][73] - Market and Operational Risks: The business is geographically concentrated in Fairfield and New Haven Counties, making it vulnerable to local economic downturns, and faces strong competition, interest rate risk, and technological risks such as system failures and cyber-crime[78][79][77][84] - COVID-19 Pandemic Risk: The pandemic has negatively impacted the economy and is likely to continue causing significant economic disruption, potentially leading to increased loan delinquencies, defaults, and reduced demand for services[94] - Regulatory Risks: The company operates in a highly regulated environment, where compliance with complex laws is costly, and changes in regulations or adverse findings from regulatory examinations could lead to remedial actions, penalties, and growth restrictions[95][97][98] Unresolved Staff Comments The company reports no unresolved staff comments - There are no unresolved staff comments[109] Properties The company maintains a main office and executive offices in New Canaan, with a mix of owned and leased branch locations across its primary service areas - The Bank's main office is leased, while the executive management office property was purchased in 2016, and the company has entered into a 10-year lease for a new headquarters building at 258 Elm Street in New Canaan[111] Branch Office Ownership Status | Branch Location | Status | | :--- | :--- | | Elm Street, New Canaan | Leased | | Cherry Street, New Canaan | Leased | | Bedford, Stamford | Leased | | High Ridge, Stamford | Leased | | Black Rock, Fairfield | Leased | | Sasco Hill, Fairfield | Leased | | Wilton | Owned | | Norwalk | Leased | | Hamden | Owned | | Westport | Leased | Legal Proceedings The company is party to various litigation matters incidental to its business but does not believe the resolution of any current proceedings would have a material adverse effect on its financial condition or results of operations - The company is not presently a party to any legal proceedings that are expected to have a material adverse effect on its business or financial condition[112] Mine Safety Disclosures Not applicable - This item is not applicable to the company[113] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ, with dividend payments subject to regulatory restrictions and an active share repurchase program with 307,333 shares remaining available as of December 31, 2020 - The Company's Common Stock trades on the NASDAQ Global Market under the symbol "BWFG"[116] - A share repurchase program for up to 400,000 shares was authorized on December 19, 2018, with 307,333 shares remaining available for repurchase as of December 31, 2020[119] - No shares were repurchased during the three-month period ended December 31, 2020[117][119] Selected Financial Data This section provides selected consolidated financial data for the five years ended December 31, 2020, highlighting the $5.9 million net income in 2020 and reconciliations for non-GAAP financial measures - Performance ratios for 2020 were negatively impacted by incremental loan loss reserves due to the COVID-19 pandemic and a $3.9 million one-time charge for office consolidation, vendor contract termination, and severance costs[121] Selected Financial Data (2018-2020) | Metric (in thousands, except per share) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net Interest Income | $54,835 | $53,761 | $56,326 | | Provision for Loan Losses | $7,605 | $437 | $3,440 | | Net Income | $5,904 | $18,216 | $17,433 | | Diluted EPS | $0.75 | $2.31 | $2.21 | | Total Assets | $2,253,747 | $1,882,182 | $1,873,665 | | Gross Portfolio Loans | $1,625,627 | $1,604,484 | $1,604,726 | | Total Deposits | $1,827,316 | $1,491,903 | $1,502,244 | | Total Equity | $176,602 | $182,397 | $174,196 | Non-GAAP Financial Measures The company utilizes non-GAAP financial measures such as efficiency ratio and tangible book value per share to provide additional performance insights - The company uses non-GAAP measures including "efficiency ratio", "tangible common equity ratio", and "tangible book value per share" to provide additional insight into its performance[127] Key Non-GAAP Reconciliations (2018-2020) | Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Efficiency Ratio | 73.9% | 60.2% | 59.2% | | Tangible Common Equity Ratio | 7.73% | 9.56% | 9.16% | | Tangible Book Value per Share | $22.43 | $23.15 | $22.06 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's 2020 financial performance, noting a significant decrease in net income to $5.9 million due to increased loan loss provisions and one-time charges, alongside asset growth and stable capital ratios Critical Accounting Policies and Estimates Management identifies critical accounting policies requiring significant judgment, including the allowance for loan losses and valuation of investment securities - Management identifies several critical accounting policies that require significant judgment and estimation, including the allowance for loan losses, valuation of derivative instruments, and accounting for deferred income taxes[142] - The allowance for loan losses is determined using a methodology that includes specific reserves for impaired loans and general allocations for non-impaired loans based on historical loss experience, peer data, and qualitative factors[143] Results of Operations This section details the company's operational performance, highlighting the 67.6% decrease in net income for 2020 primarily due to higher loan loss provisions and noninterest expenses 2020 vs. 2019 Performance Summary | Metric | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Net Income | $5.9M | $18.2M | -67.6% | | Diluted EPS | $0.75 | $2.31 | -67.5% | | Net Interest Income | $54.8M | $53.8M | +1.9% | | Provision for Loan Losses | $7.6M | $0.4M | +1640% | | Noninterest Income | $2.9M | $5.2M | -44.2% | | Noninterest Expense | $42.8M | $35.6M | +20.2% | - The decrease in 2020 net income was primarily driven by a $7.6 million provision for loan losses (including $9.0 million in COVID-19 related reserves) and a $3.9 million one-time charge for office consolidation, vendor contract termination, and severance[150][153][167] - Net interest margin decreased by 26 basis points to 2.77% in 2020, reflecting excess liquidity from deposit growth and the low interest rate environment[153] Financial Condition The company's financial condition shows total assets increasing to $2.3 billion in 2020, driven by liquidity management during the COVID-19 pandemic, while shareholders' equity slightly decreased Balance Sheet Summary (December 31) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Total Assets | $2.3B | $1.9B | | Gross Loans | $1.6B | $1.6B | | Total Deposits | $1.8B | $1.5B | | Shareholders' Equity | $176.6M | $182.4M | - Total assets increased primarily due to a rise in cash and cash equivalents to maintain higher liquidity during the COVID-19 pandemic[171] - Shareholders' equity decreased by $5.8 million, mainly due to an $8.1 million unfavorable impact to accumulated other comprehensive loss from interest rate swap valuations, dividends of $4.4 million, and stock repurchases of $1.0 million, partially offset by net income[171] Asset Quality Asset quality metrics deteriorated in 2020, with nonperforming assets increasing to 1.48% of total assets and a higher allowance for loan losses due to COVID-19 related risks Asset Quality Ratios (December 31) | Ratio | 2020 | 2019 | | :--- | :--- | :--- | | Nonperforming Assets to Total Assets | 1.48% | 0.56% | | Nonperforming Loans to Total Loans | 2.06% | 0.66% | | Allowance for Loan Losses to Total Loans | 1.29% | 0.84% | - Total nonaccrual loans increased to $33.4 million at year-end 2020 from $10.6 million at year-end 2019, largely due to a $25.6 million increase in the nonperforming loan population from COVID-19 impacted loans[180] - The allowance for loan losses increased by $7.5 million to $21.0 million at year-end 2020, primarily due to incremental reserves for increased credit risk related to the COVID-19 pandemic[180][187] - As of December 31, 2020, the company had active COVID-19 related loan payment deferrals totaling $29.4 million, which are not considered Troubled Debt Restructurings (TDRs) under the CARES Act[182] Liquidity and Capital Resources The company maintains strong liquidity through deposits and FHLB borrowings, with Bankwell Bank exceeding all regulatory capital requirements to be considered well-capitalized as of December 31, 2020 - Primary sources of liquidity include deposits, FHLB borrowings, and cash flows from loan and investment portfolios, supported by a detailed contingency funding plan and additional borrowing capacity[210][212] - At December 31, 2020, the Bank exceeded all regulatory capital requirements to be considered "well-capitalized"[213] Bankwell Bank Capital Ratios (December 31, 2020) | Ratio | Actual | Well-Capitalized Minimum | | :--- | :--- | :--- | | Common Equity Tier 1 Capital | 11.06% | 6.50% | | Tier 1 Capital | 11.06% | 8.00% | | Total Capital | 12.28% | 10.00% | | Tier 1 Leverage | 8.44% | 5.00% | Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk through ALCO, using simulation analysis to assess the sensitivity of net interest income and economic value of equity to rate changes, indicating a liability-sensitive position - The company measures interest rate risk using simulation of net interest income (NII) and economic value of equity (EVE)[223] Net Interest Income at Risk (Parallel Shock, 1-Year) | Rate Change (bps) | Estimated % Change in NII (Dec 31, 2020) | | :--- | :--- | | +300 | (2.00)% | | +200 | (1.70)% | | +100 | (1.00)% | | -100 | (0.30)% | Economic Value of Equity at Risk (Parallel Shock) | Rate Change (bps) | Estimated % Change in EVE (Dec 31, 2020) | | :--- | :--- | | +300 | 18.40% | | +200 | 13.80% | | +100 | 9.30% | | -100 | (47.30)% | - The NII simulation results indicate the company is liability sensitive as of December 31, 2020, while the EVE simulation shows a significant decline in a -100 bps scenario, deemed unlikely in the current environment[228][231] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2018-2020, including the unqualified auditor's report from RSM US LLP, which identified allowance for loan losses as a critical audit matter Report of Independent Registered Public Accounting Firm RSM US LLP issued an unqualified opinion on the financial statements, identifying qualitative factor adjustments to the allowance for loan losses as a critical audit matter - RSM US LLP issued an unqualified opinion, stating that the consolidated financial statements present fairly the financial position of the company as of December 31, 2020 and 2019, and the results of its operations and cash flows for the three years then ended[238] - The audit identified "Qualitative Factor Adjustments to the Allowance for Loan Losses" as a critical audit matter due to the significant auditor judgment and high degree of estimation uncertainty involved in management's subjective analysis[242][243] Consolidated Financial Statements This section provides the Consolidated Balance Sheets, Statements of Income, Comprehensive (Loss) Income, Shareholders' Equity, and Cash Flows for the company Consolidated Balance Sheet Highlights (December 31) | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $409,598 | $78,051 | | Loans receivable, net | $1,601,672 | $1,588,840 | | Total assets | $2,253,747 | $1,882,182 | | Total deposits | $1,827,316 | $1,491,903 | | Total liabilities | $2,077,145 | $1,699,785 | | Total shareholders' equity | $176,602 | $182,397 | Consolidated Statement of Income Highlights (Year Ended Dec 31) | (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net interest income | $54,835 | $53,761 | $56,326 | | Provision for loan losses | $7,605 | $437 | $3,440 | | Noninterest income | $2,884 | $5,244 | $3,900 | | Noninterest expense | $42,813 | $35,626 | $35,633 | | Net income | $5,904 | $18,216 | $17,433 | Notes to Consolidated Financial Statements Detailed notes provide further information on the company's loan portfolio, deposits, derivative instruments, and quarterly financial performance - Note 5 (Loans): As of December 31, 2020, the loan portfolio totaled $1.63 billion, with commercial real estate comprising the largest segment at $1.15 billion (70.6%), and the allowance for loan losses was $21.0 million, or 1.29% of total loans[323][187] - Note 9 (Deposits): Total deposits were $1.83 billion at year-end 2020, with time deposits of $250,000 or more aggregating $353.7 million[358][360] - Note 18 (Derivatives): The company uses interest rate swaps to manage interest rate risk, with nine swaps designated as hedging instruments totaling a notional amount of $225 million and a net fair value liability of $23.6 million as of December 31, 2020[394][397] - Note 24 (Quarterly Info): In Q4 2020, the company recognized a $3.9 million one-time charge related to office consolidation ($2.0M), vendor contract termination ($1.1M), and employee severance ($0.8M), significantly impacting quarterly earnings[430] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None - There were no changes in or disagreements with accountants on accounting and financial disclosure[434] Controls and Procedures Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2020 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[435] - Based on an assessment using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2020[439] Other Information None - There is no other information to report[440] PART III Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Principal Accountant Fees Information for these items, covering directors, executive officers, compensation, security ownership, and accountant fees, is incorporated by reference from the company's 2021 proxy statement - The information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the Registrant's definitive proxy statement for its 2021 Annual Meeting of Stockholders[443][444] PART IV Exhibits, Financial Statement Schedules This section lists the financial statements and various exhibits filed with or incorporated by reference into the Form 10-K, including corporate governance documents and material contracts - This section lists the consolidated financial statements included in Item 8 of the report[447] - An Exhibit Index is provided, listing all documents filed as part of the Form 10-K, such as corporate governance documents, material contracts, and certifications[450] Form 10-K Summary None - No Form 10-K summary is provided[454]