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
For the fiscal year ended December 31, 2019
or
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
(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)
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
Securities registered pursuant to Section 12(g) of the Act: None
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 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).
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
Non-accelerated filer
Emerging growth company
Accelerated filer
Smaller reporting company
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
No
1
Aggregate market value of the voting stock held by non-affiliates of the registrant as of June 28, 2019 based on the closing price of
the common stock as reported on the NASDAQ Global Market: $188,328,281
As of February 21, 2020, there were 7,931,168 shares of the registrant’s common stock outstanding.
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 2019 fiscal year, are incorporated by reference into Part III of this report on form 10-
K.
DOCUMENTS INCORPORATED BY REFERENCE
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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.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . .
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Item 9.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . .
114
Item 9A.
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
114
Item 9B.
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
116
PART III
Item 10.
Directors, Executive Officers and Corporate Governance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
117
Item 11.
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
117
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . .
117
Item 13.
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . .
117
Item 14.
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
117
PART IV
Item 15.
Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Item 16.
Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
119
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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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 Securities Exchange Act of 1934, or 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 materially 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;
• Credit risk and resulting 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;
• Changes in our key management personnel;
•
Inability 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 which 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 Company
Accounting Oversight Board or the Financial Accounting Standards Board;
• Changes in law and regulatory requirements (including those concerning taxes, banking, securities and insurance);
and
• Further governmental intervention in the U.S. financial system.
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 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.
1
General
Bankwell Financial Group, Inc. is a bank holding company, headquartered in New Canaan, Connecticut and offers a broad
range of financial services through its banking subsidiary, Bankwell Bank (collectively, we, our, us, the Company or the Bank),
a Connecticut state chartered non-member bank founded in 2002. Our primary market is the New York metropolitan area, including
Fairfield and New Haven Counties, Connecticut, which we serve from our main banking office located in New Canaan, Connecticut
and eleven other branch offices located throughout the Fairfield and New Haven Counties area. As of December 31, 2019, on a
consolidated basis, we had total assets of approximately $1.9 billion, net loans of approximately $1.6 billion, total deposits of
approximately $1.5 billion, and shareholders’ equity of approximately $182.4 million.
We are committed to being the premier “Hometown” bank in Fairfield and New Haven Counties and surrounding areas. We
believe that our market exhibits attractive demographic attributes and presents 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.
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 markets 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, which was merged into Bankwell
Bank. On October 1, 2014, we acquired Quinnipiac Bank and Trust Company, which 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, 2015 through December 31, 2019, our total assets grew from $1.3 billion to approximately $1.9 billion; our
gross loans outstanding grew from $1.1 billion to $1.6 billion and our deposits grew from $1.0 billion to approximately $1.5 billion.
We believe this growth was driven by our ability to provide superior service to our customers and our financial stability.
Business Strategy
We are focused on being the “Hometown” bank and banking provider of choice in our highly attractive market areas 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. 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 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. 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 continually upgrade 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, 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 process 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
2
and other members of management. This committee reviews risks associated with new initiatives and programs as well
as assesses risks and mitigants throughout areas of the Bank on an ongoing basis. Internal review procedures are performed
regarding anti-money laundering and consumer compliance requirements.
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:
• Our Market. Our current market is defined as the New York metropolitan area, including Fairfield and New Haven
Counties, Connecticut. This 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 based on median household
income according to estimates from the 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, acquiring and integrating financial institutions. Our executive
management team includes Christopher R. Gruseke, President and Chief Executive Officer (since 2015), Penko Ivanov,
Executive Vice President, Chief Financial Officer (since 2016), Christine A. Chivily, Executive Vice President, Chief
Risk and Credit Officer (since 2013), and Laura Waitz, Executive Vice President, Chief of Staff (since 2017).
• 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. 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 take advantage of the market opportunity present in our primary
market.
•
•
Strong Capital Position. At December 31, 2019, we had a 9.56% tangible common equity ratio, and the Bank had a
10.99% tier 1 leverage ratio and a 12.53% tier 1 risk-based ratio. We believe that our ability to attract and generate 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 offer our customers maximum flexibility and to 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, 2019, we had a total of 157 full-time equivalent employees. None of our employees are subject to a collective
bargaining agreement.
Company Website and Availability of Securities and Exchange Commission Filings
Information regarding the Company is available through the Investor Relations link at www.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 www.sec.gov and
at www.mybankwell.com under the Investor Relations link. Information on the website is not incorporated by reference and is
not a part of this annual report on Form 10-K.
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 higher lending limits, and more 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 and professionals. This focus includes retail, service,
wholesale distribution and manufacturing 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 institutions
for the primary banking relationships of large corporations. 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
3
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 our primary market area of the New York metropolitan area, including Fairfield and New Haven Counties,
Connecticut.
Lending Activities
General. Our primary lending focus is to serve commercial and middle-market businesses and not-for-profit organizations
with a variety of financial products and services, while maintaining strong and disciplined credit policies and procedures. We offer
a wide array of commercial 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 medium-sized businesses and real estate construction and development loans.
We focus our lending activities on loans that we originate to borrowers located in our market. We have established an informal,
internal lending limit to one relationship of up to 40% of unimpaired capital and allowance for loan losses, if secured by commercial
real estate. A relationship in this instance is defined as loans made to different entities but with a shared borrower principal(s). For
individual loans, limits are set so as not to exceed the statutory maximum of 15% of unimpaired capital and allowance for loan
losses.
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-sized businesses. 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, proficient underwriting and timely decision making for new loan requests due to our
efficient approval structure and local decision-making. We believe this gives us a competitive advantage over larger institutions
that are not as nimble.
Total loans before deferred loan fees and the allowance for loan losses were $1.6 billion at December 31, 2019. Since
December 31, 2015, total loans have increased $0.5 billion from $1.1 billion, reflecting strong organic loan growth. The following
table summarizes the composition of our loan portfolio for the dates indicated.
2019
2018
At December 31,
2017
(In thousands)
2016
2015
Real estate loans:
Residential. . . . . . . . . $
Commercial . . . . . . . .
Construction . . . . . . .
Commercial business. .
Consumer. . . . . . . . . . .
147,109
$
178,079
$
193,524
$
195,729
$
1,128,614
98,583
1,374,306
230,028
150
1,094,066
73,191
1,345,336
258,978
412
987,242
101,636
1,282,402
259,995
619
845,322
107,441
1,148,492
215,914
1,533
193,110
697,542
82,273
972,925
172,853
1,735
Total loans . . . . . . $
1,604,484
$
1,604,726
$
1,543,016
$
1,365,939
$
1,147,513
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2019
2018
At December 31,
Percent of Loan Portfolio
2017
2016
2015
Real estate loans:
Residential. . . . . . . . .
Commercial . . . . . . . .
Construction . . . . . . .
Commercial business. .
Consumer. . . . . . . . . . .
Total loans . . . . . .
9.17%
11.10%
12.54%
14.33%
16.83%
70.34
6.14
85.65
14.34
0.01
68.18
4.56
83.84
16.14
0.02
63.98
6.59
83.11
16.85
0.04
61.89
7.86
84.08
15.81
0.11
60.79
7.17
84.79
15.06
0.15
100.00%
100.00%
100.00%
100.00%
100.00%
Commercial loans. We offer a wide range of commercial loans, including business term loans, equipment financing and
lines of credit. Our target commercial loan market is small to medium-sized businesses, including retail and professional
establishments. 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 two years and usually
are secured by accounts receivable, inventory and/or personal guarantees of the principals of the business and at times 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 fully or partially
amortized during the loan term with any balloon amount 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 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 than our consumer real estate and consumer loan portfolios.
Commercial real estate loans. We offer real estate loans for owner-occupied commercial properties 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 throughout this document. Commercial real estate
loan terms generally are limited to ten years or less, although payments may be structured on a longer amortization basis of twenty
to thirty 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 these loans. We often require personal
guarantees from the principal owner of the business or real estate supported by a review of the principal owner's 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, property use trends, business sector changes, environmental
contamination, and the quality of the borrower’s management. We make efforts to limit our risk by analyzing the borrower's 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 than our consumer real estate and consumer loan portfolios.
Construction loans. Our construction portfolio includes loans to small and medium-sized businesses to construct owner-
used 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, leasing
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.
5
Consumer real estate loans. In the fourth quarter of 2017, management made the strategic decision to no longer originate
residential mortgage loans. As of the beginning of the third quarter of 2019, the Company no longer offered home equity loans or
lines of credit. Prior to these decisions we offered 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 originated for sale 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 may 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, 2019, our consumer loans represented
less than 1% of our total loan portfolio. While consumer loans may not remain below 1% of our 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.
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 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, rather 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.
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 Risk and Credit Officer and our Directors' Loan Committee.
We have also established an informal, internal lending limit to one relationship of up to 40% of unimpaired capital and allowance
for loan losses, if secured by commercial real estate. A relationship in this instance is defined as loans made to different entities
but with a shared borrower principal(s). For individual loans, limits are set so as not to exceed the statutory maximum of 15% of
unimpaired capital and allowance for loan losses. Our top 20 borrowing relationships range in exposure from $16.4 million to
$87.0 million and are monitored on an on-going basis.
Loan approval process. We seek to achieve an appropriate balance between prudent and 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 Directors’ 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 Directors’ 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, portfolio management 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 on an ongoing
basis and insurance and tax payment monitoring is in place. 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.
For 2019, it was our policy to review amortizing commercial loans in excess of $1 million on an annual basis, or more
frequently through the receipt of interim and annual financial statements and borrowing base certificates depending on loan structure
and covenants. Our policies require rapid notification of delinquency and prompt initiation of collection actions. Relationship
managers, portfolio managers, credit administration personnel and senior management proactively support collection activities in
order to maximize accountability and efficiency.
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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, confirm or change
the risk rating assigned to each loan. Relationship managers and portfolio managers are encouraged to bring potential credit issues
to the attention of our Chief Risk and 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.
Loans that are upgraded or downgraded are reviewed by our Chief Risk and Credit Officer, while Watch List loans undergo
a detailed quarterly analysis prepared by the relationship manager or portfolio manager and reviewed by management. 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 loan review performed semi-
annually, which includes the accuracy of our loan risk ratings and our credit administration functions. Finally, we perform an
annual stress test of our commercial loan 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 committees. 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. Our investment 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. The portfolio’s secondary purpose is to generate adequate earnings
to provide and contribute to stable income and to generate a profitable return while minimizing risk. Additionally, our investment
portfolio may be 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 income-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 have built a network of twelve deposit-taking branch offices and attracted significant transaction
account business through our relationship-based approach.
Borrowed Funds
The Bank is a member of the Federal Home Loan Bank of Boston (FHLB), which is part of a twelve district Federal Home
Loan Bank System. Members are required to own capital stock of the FHLB, and borrowings are collateralized by qualifying
assets not otherwise pledged. The maximum amount of credit that the FHLB 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 FHLB as part of our
overall funding strategy to meet short-term liquidity needs and, to a lesser degree, manage interest rate risk arising from the
difference in asset and liability maturities.
On August 19, 2015, the Company completed a private placement of $25.5 million in aggregate principal amount of fixed
rate subordinated notes (the “Notes”) to certain institutional investors. The Notes are non-callable for five years, have a stated
maturity of August 15, 2025, and bear interest at a quarterly pay fixed rate of 5.75% per annum to the maturity date or the early
redemption date (August 2020 and annually thereafter). The Notes have been structured to qualify for the Company as Tier 2
capital under regulatory guidelines. We used the net proceeds for general corporate purposes, which included maintaining liquidity
at the holding company, providing equity capital to the Bank to fund balance sheet growth and our working capital needs.
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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 historically 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 by experienced relationship managers, lending and credit management. We perform quarterly reviews of
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 loan 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 or businesses 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 and Credit Officer oversees
the Risk Management function and chairs a Risk Management Steering Committee. We currently outsource our asset/liability
calculations to a reputable third party, and on a quarterly basis, that third party runs the full interest rate risk model. Results of the
model are reviewed and validated by our ALCO.
Supervision and Regulation
General
The 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.
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 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 the material laws, rules and regulations applicable to our operations, but does not
purport to be a complete summary of all applicable laws, rules and regulations. These laws, rules and regulations may change
from time to time and the regulatory agencies often have broad discretion in interpreting them. Any change in such laws, rules 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.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Act has significantly changed the current bank regulatory structure and continues to affect the lending and
investment activities and general operations of depository institutions and their holding companies.
The current United States government administration had announced that it intends to slow down the adoption of new Dodd-
Frank Act regulations and to consider proposing changes to the legislation. The following summary assumes no changes to the
Dodd-Frank Act and regulations adopted to date, other than as noted below in our discussion of the Economic Growth, Regulatory
Relief, and Consumer Protection Act.
The Dodd-Frank Act created the 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 gives state attorneys general certain authority to enforce applicable
federal consumer protection laws.
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The Dodd-Frank Act made many other changes to banking regulations 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. Much of the rulemaking under the Dodd-Frank Act has been completed. Digesting and implementing that rulemaking
has inevitably resulted in increases in our operating and compliance costs. The rulemaking that remains may also have a similar
impact.
On January 30, 2020, the federal banking agencies issued proposed revisions to the Dodd-Frank Act which would provide
certain exceptions to the Dodd-Frank Act’s “Volcker Rule” (which generally restricts certain banking entities such as the Company
and the Bank from engaging in proprietary trading activities and entering into certain relationships with hedge funds and private-
equity funds). The effect of this proposed change, and any further rules or regulations, are and could be complex and far-reaching,
and the change and any future laws or regulations or changes thereto could negatively impact our operations, cash flows or financial
condition, impose additional costs on us, intensify the regulatory supervision of us or otherwise adversely affect our business,
financial condition and results of operations.
Economic Growth, Regulatory Relief, and Consumer Protection Act
The Economic Growth, Regulatory Relief, and Consumer Protection Act (the EGRRCPA) became law on May 24, 2018.
The EGRRCPA keeps in place fundamental aspects of the current bank regulatory structure, but provides community banks with
relief from certain regulatory requirements, including some imposed by the Dodd-Frank Act.
Among other things, Section 201 of the EGRRCPA required the federal banking agencies to develop regulations establishing
a “community bank leverage ratio” for banks and holding companies with less than $10 billion in consolidated assets and a
qualifying risk profile. In 2019, the federal banking agencies jointly issued a final rule to implement Section 201. The rule, which
became effective on January 1, 2020, provides certain qualifying institutions with an optional, simpler method to measure capital
adequacy. Under the rule, banks and bank holding companies that have less than $10 billion in total consolidated assets and meet
other qualifying criteria, including a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) of greater
than 9 percent, will be eligible to opt into the community bank leverage ratio ("CBLR") framework. Qualifying organizations that
elect to use the CBLR framework, and that maintain a leverage ratio greater than 9 percent, will be considered to have satisfied
the generally applicable risk-based and leverage capital requirements in the banking agencies' capital rules. Qualifying organizations
will also be deemed to have met the "well capitalized" ratio requirements for purposes of Section 38 of the Federal Deposit
Insurance Act.
The EGRRCPA provides insured depository institutions and their affiliates with less than $10 billion in total consolidated
assets and limited trading activities with an exemption from the Dodd-Frank Act’s “Volcker Rule” (which generally restricts certain
banking entities such as the Company and the Bank from engaging in proprietary trading activities and entering into certain
relationships with hedge funds and private-equity funds). In July of 2019, the FDIC, along with several other banking agencies,
adopted a final rule to implement the exemption contemplated by the EGRRCPA.
The EGRRCPA increased the consolidated assets limit for bank holding companies covered by the Federal Reserve Board’s
“Small Bank Holding Company Policy Statement” (the Policy) from $1 billion to $3 billion. In addition to the consolidated assets
limit, a covered bank holding company may not be engaged in significant non-banking and off-balance sheet activities and may
not have a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with
the SEC. The Federal Reserve Board retains the authority to exclude any bank holding company from the Policy if such action is
warranted for supervisory purposes. The Policy allows covered bank holding companies to operate with higher levels of debt than
would normally be permitted. Under the Policy, a covered bank holding company is prohibited from paying dividends if its debt-
to-equity ratio exceeds 1:1. In addition, the Federal Reserve Board expects that bank holding companies will retire all debt within
25 years of being incurred and reduce their debt to equity ratio to 30:1 or less within 12 years of incurring the debt. The Policy
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also directs that each depository institution subsidiary of a covered bank holding company remain well-capitalized. On August
28, 2018, the Federal Reserve Board issued an interim final rule regarding revisions to the Policy prompted by the EGRRCPA.
The EGRRCPA increased the consolidated assets threshold from $1 billion to $3 billion for insured depository institutions
that qualify for an 18-month on-site exam cycle. Consistent with this statutory amendment, in August of 2018, the federal banking
agencies issued an interim final rule to increase, from $1 billion to $3 billion, the total asset threshold under which an agency may
apply an 18-month examination cycle for qualified institutions that have an "outstanding" or "good" composite rating.
The EGRRCPA required the federal banking agencies to promulgate regulations permitting insured depository institutions
that have less than $5 billion in total consolidated assets (and satisfy other conditions) to use short-form reports of condition (i.e.
call reports) for the first and third quarters of each year. On June 17, 2019, the federal banking agencies issued final rules to
implement those streamlined reporting requirements.
Connecticut Banking Laws and Supervision
Connecticut Department of Banking. The Connecticut Department of Banking regulates the 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, loans
to any one obligor under this statutory authority may not exceed 15% and fully secured loans may not exceed an additional 10%
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”. Beginning January 1, 2016, the Basel III Capital Rules limit the amount of
dividends the Bank can pay if its capital ratios are below the threshold levels of the capital conservation buffer established by the
rules. The capital conservation buffer was phased in from January 1, 2016 to January 1, 2019, when the full capital conservation
buffer of 2.5% (as a percentage of risk-weighted assets) became effective. The capital conservation buffer is in addition to the
minimum risk-based capital requirement. 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 banking law authorizes Connecticut chartered banks to transact a "general banking business" and "all
such incidental powers as are necessary thereto". With the prior approval of the Connecticut Department of Banking, Connecticut
banks are also authorized to engage in activities that are closely related to the business of banking, are convenient and useful to
the business of banking, are reasonably related to the operation of a Connecticut bank, 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 those federal statutes. Connecticut banks are also authorized to engage in any activity permitted for certain federally
chartered institutions, as well as for certain out-of-state institutions, upon filing a 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 law, 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.
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.
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
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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. As discussed above, the Federal Reserve Board’s Small Bank Holding Company
Policy Statement includes provisions regulating the payment of dividends by companies subject to that policy statement.
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. Beginning January 1, 2016, the Basel III Capital Rules limit the amount of dividends
the Bank can pay to us if its capital ratios are below the threshold levels of the capital conservation buffer established by the rules.
The capital conservation buffer was phased in from January 1, 2016 to January 1, 2019, when the full capital conservation buffer
of 2.5% (as a percentage of risk-weighted assets) became effective. The capital conservation buffer is in addition to the minimum
risk-based capital requirement. 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 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 (i) meets the well capitalized standard for commercial banks, (ii)
is “well managed” within the meaning of the Federal Reserve Board regulations and (iii) is not subject to any unresolved supervisory
issues. As discussed above, the Federal Reserve Board’s Small Bank Holding Company Policy Statement includes provisions
regulating stock redemptions by companies subject to that policy statement, including when such notice requirements apply.
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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.
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 new 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 new minimum common equity Tier 1 capital requirement of 4.5% of risk-weighted
assets; set the minimum leverage ratio at 4% of total assets; increased the minimum Tier 1 capital to risk-weighted assets requirement
from 4% to 6%; and retained the minimum total capital to risk weighted assets requirement at 8.0%. A “well-capitalized” institution
must generally maintain capital ratios 200 basis points higher than the minimum guidelines.
The Basel III Capital Rules also change the risk weights assigned to certain assets. The Basel III Capital Rules assigned a
higher risk weight (150%) to loans that are more than 90 days past due or are on nonaccrual status and to certain commercial real
estate facilities that finance the acquisition, development or construction of real property. The Basel III Capital Rules also alter
the risk weighting for other assets, including marketable equity securities that are risk weighted generally at 300%. The Basel III
Capital Rules require certain components of accumulated other comprehensive income (loss) to be included for purposes of
calculating regulatory capital requirements unless a one-time opt-out is exercised. The Bank did exercise its opt-out option and
will exclude the unrealized gain (loss) on investment securities component of accumulated other comprehensive income (loss)
from regulatory capital.
The Basel III Capital Rules limit a banking organization’s capital distributions and certain discretionary bonus payments to
executive officers if the banking organization does not hold a “capital conservation buffer” of 2.5% in addition to the minimum
risk based capital requirement. The “capital conservation buffer” was phased in from January 1, 2016 to January 1, 2019, when
the full capital conservation buffer became effective.
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.
As discussed above, the Economic Growth, Regulatory Relief, and Consumer Protection Act provided simplified capital
measurement rules for qualified community banks and holding companies with less than $10 billion in total consolidated assets
and with limited trading activities. The federal banking agencies have issued final regulations to implement this optional, simplified
framework for institutions that satisfy certain qualifying criteria, including a "community bank leverage ratio" of greater than 9
percent.
Liquidity. We are required to maintain a sufficient amount of liquid assets to ensure our safe and sound operation.
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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.
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 are considered 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
places an aggregate limit on all such transactions with all affiliates at 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 an affiliate,
or the issuance of a guarantees, acceptance, or letter of credit 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, the FRA places restrictions on extensions of credit that can by made by a depository institution
to its directors, executive officers, and principal shareholders (or insiders) and to the insiders of its affiliates. Many of those
restrictions also apply to the "related interests" of those insiders. For example, a bank is generally not permitted to extend credit
to any insider of the bank, or insider of an affiliate, if the extension, when aggregated with all other outstanding extensions of
credit to those insiders and their related interests, exceeds the bank's total unimpaired capital and unimpaired surplus. Extensions
of credit to those insiders, and their related interests, that exceed certain specified amounts must receive the prior approval of the
board of directors. Further, extensions of credit to insiders and their related interests must be made on terms substantially the same
as offered in comparable transactions to other non-insiders, subject to an exception of extensions of credit made under a benefit
or compensation program that is widely available to the depository institution’s employees that does not give preference to the
insider over the employees. The FRA places additional limitations on extensions of credit to executive officers. In addition to
enhancing restrictions on insider transactions, the Dodd-Frank Act increased 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 non-member 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 in default
of its deposit insurance assessment.
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
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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 FDIC insurance premiums would likely have an adverse effect on the operating expenses and results
of operations of the Bank. Management cannot predict what FDIC 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 are not aware of any current practice, condition or violation that might lead to
termination of the Bank’s deposit insurance.
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 Fund Transfer Act and Regulation E issued by the Consumer Financial Protection Bureau to implement that
act, which govern electronic 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. The Bank is in compliance with
these requirements.
Federal Home Loan Bank of Boston (FHLB). The Bank is a member of the FHLB, 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 FHLB, is required to acquire and hold shares of capital
stock in the FHLB.
Community Reinvestment Act (CRA). Under the CRA, as implemented 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 of CRA
is generally similar to the federal version, 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 the Connecticut CRA
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 the Bank received a CRA rating of “satisfactory”.
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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 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 (Connecticut chartered banks
are generally exempt from the Federal Truth-in-Lending Act, but are otherwise subject to a substantially similar state
Truth-in-Lending Act administered and enforced by the Connecticut Department of Banking);
• 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, color, religion 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 Practices 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;
•
Service members 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 the various federal agencies charged with the responsibility of implementing these federal laws.
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 the 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. In addition, beginning January 1, 2016, the Basel III Capital Rules limit
discretionary bonus payments to the Bank’s executive officers if its capital ratios are below the threshold levels of the capital
conservation buffer established by the rules. The capital conservation buffer was phased in from January 1, 2016 to January 1,
2019, when the full capital conservation buffer of 2.5% (as a percentage of risk-weighted assets) became effective. The capital
conservation buffer is in addition to the minimum risk-based capital requirement.
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; (2) strengthened
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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 GLBA, 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 GLBA 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
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 GLBA, 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 the 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 information 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 filed with the Treasury Department’s Financial Crimes Enforcement Network of transactions exceeding $10,000 in
currency; (4) filing suspicious activities reports by financial institutions regarding suspected customer money laundering, terrorism
financing, or other violations of 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, provides for information sharing with law enforcement and between certain financial institutions by means
of an exemption from the privacy provisions of the GLBA, 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 maintains lists of names of persons and organizations suspected of aiding, harboring or
engaging in money laundering, terrorist acts, and other crimes. 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 and combating terrorism provisions.
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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.
On December 22, 2017 the Tax Cuts and Jobs Act of 2017 was signed into law. As a result, the corporate tax rate was reduced
from 35% to 21%. Companies are required to recognize the effect of tax law changes in the period of enactment in accordance
with GAAP. As result of the tax law changes the Company recognized a write-down of its deferred tax asset position in the amount
of $3.3 million for the year ended December 31, 2017.
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: For the years ended 2018 and prior a corporation may carry back generated net operating
losses to the preceding two taxable years and forward to the succeeding 20 taxable years. For net operating losses arising in
tax years after 2018, a corporation may not carryback the net operating loss but may carryforward such losses indefinitely, however
the net operating loss deduction in a given year is limited to 80% of taxable income. At December 31, 2019, we had $2.3 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.
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.
State Taxation
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, 2019 and 2018) to arrive at Connecticut income tax. We are also subject to state income tax in other states
as a result of loan originations made in other states.
In October, 2015, the Company created Bankwell Loan Servicing Group, Inc., a Passive Investment Company (“PIC”)
organized for state income tax purposes. The PIC is a wholly-owned subsidiary of the Bank operating in accordance with Connecticut
statutes. The PIC’s activities are limited in scope to holding and managing loans that are collateralized by real estate. Income
earned by a PIC is determined in accordance with the statutory requirements for a passive investment company and the dividends
paid by the PIC to the Bank are not taxable income for Connecticut income tax purposes. As a result of the formation of the PIC,
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the Bank no longer expects to be subject to Connecticut income taxes. State taxes are being recognized for income taxes on income
earned in other states.
The Company and the Bank are not currently under audit with respect to their state tax returns.
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 and to a lesser degree secondary effects of global geopolitical events. 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-term 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 liquidity and/or depressed prices in the secondary market for mortgage loans, increased delinquencies on mortgage,
consumer and commercial loans, residential and commercial real estate price declines and lower home sales and commercial
activity. 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.
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 losses inherent in our loan portfolio. 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 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.
Our concentration of large loans to certain borrowers may increase our credit risk.
A good number of our 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 to one relationship of up to 40% of unimpaired capital
and allowance for loan losses, if secured by commercial real estate. A relationship in this instance is defined as loans made to
different entities but with a shared borrower principal(s). For individual loans, limits are set so as not to exceed the statutory
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maximum of 15% of unimpaired capital and allowance for loan losses. However, we may, under certain circumstances, consider
going above our 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 real estate that has strong tenants with long-term leases, thereby reducing the
reliance on the principals of the borrowing entity. As of December 31, 2019, our five largest relationships ranged in exposure from
approximately $35.7 million to $87.0 million. 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 one of these
borrowers becomes unable to repay a loan obligation(s) 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. 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 leasing 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. 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, the completion of the project and/or the builder’s ability to ultimately lease or 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 sale 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 have a material adverse effect on 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. 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 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 have a material adverse effect on our business, financial condition, results of operations and prospects.
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A prolonged downturn in the real estate market could result in losses and adversely affect our profitability.
As of December 31, 2019, the majority of our loan portfolio was composed of commercial real estate loans. The sale of 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. A decline in real estate values could 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.
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.
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. 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 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 the surrounding areas, and we are more
sensitive than our more geographically diversified competitors to adverse changes in the local economy.
We conduct a majority of our operations in the New York metropolitan area, including Fairfield and New Haven Counties,
Connecticut. A majority of the real estate loans in our loan portfolio are secured by properties located in the New York metropolitan
area, including Fairfield and New Haven Counties. In addition, as of December 31, 2019, the 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;
• 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
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• 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, the New York metropolitan
area, including Fairfield and New Haven Counties, Connecticut. 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. 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, another 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.
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.
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.
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, 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.
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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.
Declines in home prices and/or weak 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 loss reserves 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.
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. 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; 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.
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 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
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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 allowance for loan 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 allowance for loan 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 to one relationship of up to 40% of unimpaired capital and allowance for loan losses, if secured
by commercial real estate. A relationship in this instance is defined as loans made to different entities but with a shared borrower
principal(s). For individual loans, limits are set so as not to exceed the statutory maximum of 15% of unimpaired capital and
allowance for loan losses. 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.
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. 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. We believe that retaining the services
and skills of our management team is important to our success. The unexpected loss of services of any of our 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.
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 with respect
to individual 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
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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.
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 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 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.
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.
We may incur impairment to goodwill.
We test our goodwill for impairment at least annually. Significant negative industry or economic trends, reduced estimates
of future cash flows or disruptions to our business, could indicate that goodwill might be impaired. Our valuation methodology
for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely on
projections of future operating performance. Projections of future operating results and cash flows may vary significantly from
actual results. Additionally, if our analysis results in impairment to our goodwill, we would be required to record a non-cash charge
to earnings in our financial statements during the period in which such impairment is determined to exist. Any such charge could
have a material adverse effect on our results of operations.
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Uncertainty about the future of LIBOR may adversely affect our business.
LIBOR is used extensively in the United States as a benchmark for various commercial and financial contracts, including
adjustable rate mortgages, corporate debt, interest rate swaps and other derivatives. LIBOR is set based on interest rate information
reported by certain banks, which may stop reporting such information after 2021. There is no definitive information regarding the
future utilization of LIBOR or of any particular replacement rate. Other rates or benchmarks may perform differently than LIBOR.
It is also uncertain what will happen with instruments that rely on LIBOR for future interest rate adjustments and which remain
outstanding if LIBOR ceases to exist.
We have derivative contracts and limited loan exposure tied to LIBOR. Although we are not yet able to assess what the
ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse
effect on our business, financial condition and results of operations.
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.
Compliance with the myriad of 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,
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. 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.
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The Bank is 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, 2019 as the
Bank’s total assets exceed $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 are required to obtain an independent public accountant’s attestation report concerning our 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 cause us to incur increased expenses and 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.
Item 1B.
Unresolved Staff Comments
None.
26
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 2021,
with two remaining five-year renewal options. In July 2012, we initially leased additional space adjacent to 208 Elm Street at 220
Elm Street primarily for our executive management offices. The property located at 220 Elm Street was purchased by the Bank
in December of 2016.
We also lease office space for each of our branch offices in New Canaan, Stamford, Norwalk, Fairfield, Darien, Westport
and North Haven, Connecticut. The leases for our facilities have terms expiring at dates ranging from 2020 to 2030, 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. Management continually evaluates its branch and other office locations for opportunities to maximize
cost savings while meeting our growth needs and the needs of our customers.
Our branch offices are located as follows:
Branch
Elm Street
Cherry Street
Bedford
High Ridge
Black Rock
Sasco Hill
Wilton
Norwalk
Hamden
North Haven
Westport
Darien
Address
208 Elm Street New Canaan, CT 06840
156 Cherry Street New Canaan, CT 06840
612 Bedford Street Stamford, CT 06901
1095 High Ridge Road Stamford, CT 06905
2220 Black Rock Turnpike Fairfield, CT 06825
One Sasco Hill Road Fairfield, CT 06824
Owned or Leased
Lease (expires 2021)
Lease (expires 2021)
Lease (expires 2020)
Lease (expires 2028)
Lease (expires 2024)
Lease (expires 2024)
47 Old Ridgefield Road Wilton, CT 06897
Own
370 Westport Avenue Norwalk, CT 06851
Lease (expires 2030)
2704 Dixwell Avenue Hamden, CT 06518
24 Washington Avenue North Haven, CT 06473
100 Post Road East Westport, CT 06880
1065 Post Road Darien, CT 06820
Own
Lease (expired 2019 - currently
month-to-month)
Lease (expires 2028)
Lease (expires 2028)
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 a material adverse effect on our business, future
prospects, financial condition, liquidity, results of operation, cash flows or capital levels.
Item 4.
Mine Safety Disclosures
Not applicable.
27
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder 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.
There were approximately 289 shareholders of record of BWFG Common Stock as of December 31, 2019. 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.
Issuer Purchases of Equity Securities
The following table includes information with respect to repurchases of the Company’s Common Stock during the three month
period ended December 31, 2019 under the Company’s share repurchase program.
Issuer Purchases of Equity Securities
Period
Total Number
of Shares (or
Units)
Purchased
Average Price
Paid per Share
(or Unit)
Total Number
of Shares (or
Units)
Purchased as
Part of Publicly
Announced
Plans or
Programs
Maximum
Number (or
Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or
Programs(1)
October 1, 2019 - October 31, 2019 . . . . . . .
November 1, 2019 - November 30, 2019 . . .
December 1, 2019 - December 31, 2019 . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $
—
—
— $
—
—
—
—
—
—
—
—
365,832
365,832
365,832
365,832
(1) 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 may repurchase shares in open market transactions or by 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.
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.
28
Index
Bankwell Financial Group,
Inc. . . . . . . . . . . . . . . . . . . .
Nasdaq Composite Index. .
Nasdaq Bank Index . . . . . .
5/15/2014
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
100.00
100.00
100.00
116.67
116.39
109.89
110.28
123.05
117.17
180.56
132.29
158.21
190.78
169.65
163.76
159.50
163.06
134.44
160.22
220.50
162.99
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 balance sheet data as of December 31, 2019 and 2018 and the selected consolidated statement of income data for
the years ended December 31, 2019, 2018 and 2017 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 balance sheet data as of
December 31, 2017, 2016 and 2015 and the selected consolidated statement of income data for the years ended December 31,
2016 and 2015 has 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.
Net income for the year ended December 31, 2017 was negatively impacted by the Tax Cuts and Jobs Act of 2017 as it relates
to legislation that required a re-measurement of our deferred tax asset, which required a $3.3 million write-off recognized as a
direct increase to income tax expense. As a result, the performance metrics presented below have been adversely impacted due to
the decline in net income driven by this write-off.
29
Selected Financial Data
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) . . . . . . . . . . . . . . . . .
Dividend payout ratio(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 charge-offs (recoveries) to average loans(d) . . . . . . . . . . . . . . . . . . .
Statements of Financial Condition:
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross portfolio loans(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
At or For the Years Ended December 31,
2019
2018
2017
2016
2015
(Dollars in thousands, except per share data)
82,948
29,187
53,761
437
53,324
5,244
35,626
22,942
4,726
18,216
18,216
2.32
2.31
23.51
23.15
$
$
$
$
80,064
23,738
56,326
3,440
52,886
3,900
35,633
21,153
3,720
17,433
17,433
2.23
2.21
22.43
22.06
$
$
$
$
$
$
$
$
71,201
16,837
54,364
1,341
53,023
4,629
32,523
25,129
11,299
13,830
13,830
1.80
1.78
20.98
20.59
60,990
11,898
49,092
3,914
45,178
2,676
29,544
18,310
5,960
12,350
12,350
1.64
1.62
19.39
18.98
$
50,754
7,966
42,788
3,230
39,558
3,484
29,171
13,871
4,841
9,030
8,905
1.23
1.21
17.87
17.43
$
$
$
22.51 %
21.72 %
15.73 %
13.58 %
4.13 %
7,757,828
7,757,355
7,784,631
7,764,647
7,722,175
7,775,480
7,676,238
7,572,409
7,670,413
7,524,069
7,396,019
7,491,052
7,372,968
7,071,550
7,140,558
0.97 %
10.20 %
10.20 %
9.53 %
3.03 %
60.2 %
0.77 %
0.66 %
0.56 %
0.94 %
10.19 %
10.19 %
9.24 %
3.18 %
59.2 %
0.78 %
0.88 %
0.75 %
0.80 %
8.93 %
8.93 %
8.97 %
3.30 %
54.9 %
1.67 %
0.36 %
0.31 %
0.85 %
8.94 %
8.94 %
9.47 %
3.54 %
56.5 %
0.47 %
0.22 %
0.20 %
0.75 %
6.67 %
6.76 %
11.08 %
3.77 %
62.3 %
0.51 %
0.33 %
0.38 %
127.59 %
109.80 %
344.90 %
612.26 %
373.76 %
0.84 %
0.15 %
0.96 %
0.44 %
1.23 %
0.03 %
1.32 %
0.01 %
1.23 %
(0.01)%
$ 1,882,182
$ 1,873,665
$ 1,796,607
$ 1,628,919
$ 1,330,372
1,604,484
100,865
1,604,726
116,584
1,502,244
160,000
25,155
174,196
1,543,016
113,767
1,398,405
199,000
25,103
161,027
1,365,939
1,147,513
104,610
50,807
1,289,037
1,046,942
160,000
25,051
145,895
120,000
25,000
131,769
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,491,903
FHLB borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital Ratios:
150,000
25,207
182,397
Tier 1 capital to average assets
Bankwell Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.99 %
10.14 %
9.61 %
10.10 %
10.84 %
Tier 1 capital to risk-weighted assets
Bankwell Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12.53 %
11.56 %
10.99 %
11.59 %
12.18 %
Total capital to risk-weighted assets
Bankwell Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity to total assets . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible common equity ratio(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.35 %
9.69 %
9.56 %
12.50 %
9.30 %
9.16 %
12.19 %
8.96 %
8.81 %
12.85 %
8.96 %
8.78 %
13.39 %
9.90 %
9.68 %
(a) Excludes preferred stock and unvested restricted stock awards.
30
(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 dividend.
(d) Calculated using the principal amounts outstanding on loans.
(e) Nonperforming assets consist of nonperforming loans and other real estate owned.
(f) The Company paid its first quarterly dividend to shareholders in the fourth quarter of 2015. The dividend payout ratio
is calculated as follows: dividends per share divided by diluted earnings per share.
NON-GAAP FINANCIAL MEASURES
We identify “efficiency ratio”, “tangible common equity ratio”, “tangible book value per share”, “total revenue” and “return
on average common shareholders’ equity” 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, other real estate owned
expenses and amortization of intangible assets, divided by our operating revenue, which is equal to net interest income plus non-
interest income excluding gains and losses on sales of securities and gains and losses on other real estate owned. 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.
Tangible common equity is defined as total shareholders’ equity, excluding preferred stock, less 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.
Return on average common shareholders’ equity is defined as net income attributable to common shareholders divided by
total average shareholders’ equity less average preferred stock, if any.
The information provided below presents a reconciliation of each of our non-GAAP financial measures to the most directly
comparable GAAP financial measure.
31
Years Ended December 31,
2019
2018
2017
2016
2015
(Dollars in thousands, except per share data)
Efficiency Ratio
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
35,626
$
35,633
$
32,523
$
29,544
$
29,171
Less: other real estate owned expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: merger and acquisition expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted noninterest expense (numerator) . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments for: gains/(losses) on sales of securities . . . . . . . . . . . . . . . . . .
Adjustments for: (losses) gains on sale of other real estate owned . . . . . . . .
37
75
—
35,514
53,761
5,244
76
(102)
$
$
—
92
—
35,541
56,326
3,900
222
—
$
$
70
118
—
32,335
54,364
4,629
165
(78)
$
$
157
151
—
29,236
49,092
2,676
(115)
128
$
$
168
196
2
28,805
42,788
3,484
—
—
Adjusted operating revenue (denominator) . . . . . . . . . . . . . . . . . . . . . . . . . . $
59,031
$
60,004
$
58,906
$
51,755
$
46,272
Efficiency ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60.2%
59.2%
54.9%
56.5%
62.3%
Tangible Common Equity and
Tangible Common Equity/Tangible Assets
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
182,397
$
174,196
$
161,027
$
145,895
$
131,769
Less: preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Common shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
182,397
Less: Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,803
—
174,196
2,879
—
161,027
2,971
—
145,895
3,090
—
131,769
3,241
Tangible Common shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
179,594
$
171,317
$
158,056
$
142,805
$
128,528
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,882,182
$ 1,873,665
$ 1,796,607
$ 1,628,919
$ 1,330,372
Less: Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,803
2,879
2,971
3,090
3,241
Tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,879,379
$ 1,870,786
$ 1,793,636
$ 1,625,829
$ 1,327,131
Tangible common shareholders’ equity to tangible assets. . . . . . . . . . . . . . .
9.56%
9.16%
8.81%
8.78%
9.68%
Tangible Book Value per Share
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
182,397
$
174,196
$
161,027
$
145,895
$
131,769
Less: preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Common shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
182,397
Less: Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,803
—
174,196
2,879
—
161,027
2,971
—
145,895
3,090
—
131,769
3,241
Tangible common shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
179,594
$
171,317
$
158,056
$
142,805
$
128,528
Common shares issued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,868,803
7,842,271
7,751,424
7,620,663
7,516,291
Less: shares of unvested restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .
110,975
77,624
75,186
96,594
143,323
Common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,757,828
7,764,647
7,676,238
7,524,069
7,372,968
Book value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Less: effects of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible Book Value per Common Share. . . . . . . . . . . . . . . . . . . . . . . . . . . . $
23.51
0.36
23.15
Total Revenue
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
53,761
Add: noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,244
Total Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
59,005
Noninterest income as a percentage of total revenue . . . . . . . . . . . . . . . . . .
8.89%
Return on Average Common Shareholders’ Equity
Net Income Attributable to Common Shareholders. . . . . . . . . . . . . . . . . . . . $
18,216
Total average shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
178,510
Less: average preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
$
$
$
$
$
$
22.43
0.37
22.06
56,326
3,900
60,226
6.48%
17,433
171,024
—
$
$
$
$
$
$
20.98
0.39
20.59
54,364
4,629
58,993
7.85%
13,830
154,929
—
$
$
$
$
$
$
19.39
0.41
18.98
49,092
2,676
51,768
5.17%
12,350
138,131
—
$
$
$
$
$
$
17.87
0.44
17.43
42,788
3,484
46,272
7.53%
8,905
133,553
—
Average Common Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
178,510
171,024
154,929
138,131
133,553
Return on Average Common Shareholders’ Equity . . . . . . . . . . . . . . . . . . . .
10.20%
10.19%
8.93%
8.94%
6.67%
32
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, we serve small and medium-sized businesses and retail customers in the New York metropolitan
area and throughout Connecticut with the majority of our loans in Fairfield and New Haven Counties, Connecticut. 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.
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 being the “Hometown” bank and the banking provider of choice in our 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; and
• Disciplined focus on risk management.
On August 19, 2015, the Company completed a private placement of $25.5 million in aggregate principal amount of fixed
rate subordinated notes (the “Notes”) to certain institutional investors. The Notes are non-callable for five years, have a stated
maturity of August 15, 2025, and bear interest at a quarterly pay fixed rate of 5.75% per annum to the maturity date or the early
redemption date, August 2020 and annually thereafter.
On June 9, 2018, we opened three De Novo branches located in Darien, Westport, and Stamford, Connecticut, increasing our
total number of branches to twelve.
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.
Net income for the year ended December 31, 2017 was negatively impacted by the Tax Cuts and Jobs Act of 2017 as it relates
to legislation that required a re-measurement of our deferred tax asset, which required a $3.3 million write-off recognized as a
direct increase to income tax expense. As a result, the performance metrics presented below have been adversely impacted due to
the decline in net income driven by this write-off.
33
Key Financial Measures
Selected balance sheet measures:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross portfolio loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected statement of income measures:
Total revenue(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income before provision for loan losses . . . . . . . . . . . . . . . . . . .
Income before income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Key Financial Measures(a)
At or For the Years Ended December 31,
2019
2018
2017
(Dollars in thousands, except per share data)
1,882,182
1,604,484
1,491,903
150,000
25,207
182,397
59,005
53,761
22,942
18,216
2.32
2.31
$
$
$
1,873,665
1,604,726
1,502,244
160,000
25,155
174,196
60,226
56,326
21,153
17,433
2.23
2.21
$
$
$
1,796,607
1,543,016
1,398,405
199,000
25,103
161,027
58,993
54,364
25,129
13,830
1.80
1.78
Key Financial Measures(a)
At or For the Years Ended December 31,
2019
2018
2017
Other financial measures and ratios:
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average common shareholders’ equity(c) . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Efficiency ratio(c). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible book value per share (end of period)(c)(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net charge-offs to average loans(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming assets to total assets(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses to nonperforming loans. . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses to total loans(b). . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.97%
10.20%
3.03%
60.2%
0.94%
10.19%
3.18%
59.2%
0.80%
8.93%
3.30%
54.9%
23.15
$
22.06
$
20.59
0.15%
0.56%
127.59%
0.84%
0.44%
0.75%
109.80%
0.96%
0.03%
0.31%
344.90%
1.23%
(a) We have derived the selected balance sheet measures as of December 31, 2019 and 2018 and the selected statement of
income measures for the years ended December 31, 2019, 2018 and 2017 from our audited consolidated financial
statements included elsewhere 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.
(d) Excludes unvested restricted stock awards.
(e) Nonperforming assets consist of nonperforming loans and other real estate owned.
34
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. 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.
We believe that accounting estimates related to the measurement of the allowance for loan losses, the valuation of derivative
instruments, investment securities and deferred income taxes, and the evaluation of investment securities for other than temporary
impairment are particularly critical and susceptible to significant near-term change.
Allowance for Loan Losses
Determining an appropriate level of allowance for loan losses 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 elements for specific reserves on impaired loans and loss allocations
for non-impaired loans.
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 nonaccrual loans 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. 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 allocations for non-impaired loans are determined by portfolio segment and are based on the Bank’s and peer banks’
historical loss experiences over an economic cycle adjusted for qualitative factors. Qualitative factors include, but are not limited
to, lending policies and procedures, nature and volume of the portfolio, concentrations of credit, lending management and staff,
volume and severity of problem loans, quality of review and rating systems, value of underlying collateral, current economic
conditions, and competitive and regulatory issues. 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. During 2017, we updated our allowance methodology and
underlying loan loss assumptions, incorporating recent industry and product loss trends. This resulted in a non-recurring pretax
$1.3 million reduction in the allowance and increase in earnings.
Loss allocations for non-impaired loans are based on 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 5 of the Notes to Consolidated Financial
Statements. The loan rating system and the related loss allocation factors take into consideration parameters including the borrower’s
financial condition, the borrower’s 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 the age of the
portfolio and the Bank’s experience with a particular loan product. We periodically reassess and adjust the loss allocation factors
used in the assignment of loss 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 to appropriately reflect our analysis of
migratory loss experience.
Because the methodology is partly 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, 2019, management believes that the allowance is adequate and consistent with asset quality and delinquency
indicators.
35
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 various hedges. Additionally, the Company assesses 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 ASC 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.
The Company also has derivatives not designated as hedges. Derivatives not designated as hedges are not speculative and
result from a service the Company provides to certain loan customers. The Company executes interest rate swaps with commercial
banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged
by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure
resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting
requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in
earnings.
Investment Securities Valuation
Fair values of the Company’s investment securities 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 Company’s
private placement municipal housing authority bonds, classified as held to maturity, have no available quoted market price. The
fair value for these securities is estimated using a discounted cash flow model. Due to the judgments and uncertainties involved
in the estimation process, the estimates could result in materially different results under different assumptions and conditions.
Evaluation of Investment Securities for Other Than Temporary Impairment
The Company evaluates investment securities within the Company’s available for sale and held to maturity portfolios for
other-than-temporary impairment (“OTTI”), at least quarterly. If the fair value of a debt security is below the amortized cost basis
of the security, OTTI is required to be recognized if any of the following are met: (1) the Company intends to sell the security;
(2) it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis;
or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For
all impaired debt securities that are intended for sale, or more likely than not will be required to sell, the full amount of the loss
is recognized as OTTI through earnings. Credit related OTTI for all other impaired debt securities is recognized through earnings.
Non-credit related OTTI for such debt securities is recognized in other comprehensive income, net of applicable taxes. Should
actual factors and conditions differ materially from those expected by management, the actual realization of gains or losses on
investment securities could differ materially from the amounts recorded in the financial statements.
Deferred Income Taxes
In accordance with ASC Topic 740, “Income Taxes,” certain aspects of accounting for income taxes require significant
management judgment, including assessing the realizability of Deferred Tax Assets (DTAs). Such judgments are subjective and
involve estimates and assumptions about matters that are inherently uncertain. Should actual factors and conditions differ materially
from those used by management, the actual realization of DTAs could differ materially from the amounts recorded in the
Consolidated Financial Statements and the accompanying Notes thereto.
DTAs generally represent items for which a benefit has been recognized for financial accounting purposes that cannot be
realized for tax purposes until a future period. The realization of DTAs depends upon future sources of taxable income. Valuation
allowances are established for those DTAs determined not likely to be realized based on management’s judgment.
36
Earnings and Performance Overview
2019 Earnings Overview
Our net income for the year ended December 31, 2019 was $18.2 million, an increase of $0.8 million, or 4.5%, compared to
the year ended December 31, 2018. Net income available to common shareholders for the year ended December 31, 2019 was
$18.2 million, or $2.31 per diluted share, compared to net income available to common shareholders of $17.4 million, or $2.21
per diluted share for the year ended December 31, 2018. Our returns on average shareholders' equity and average assets for the
year ended December 31, 2019, were 10.20% and 0.97%, respectively, compared to 10.19% and 0.94%, respectively for the year
ended December 31, 2018.
The increase in net income for 2019 compared to 2018 was primarily due to elevated loan prepayments and a decline in loan
charge-offs in 2019 when compared to 2018. Net interest income for the year ended December 31, 2019 was $53.8 million, a
decrease of $2.6 million compared to the year ended December 31, 2018. Our net interest margin decreased 15 basis points to
3.03% for the year ended December 31, 2019 compared to the year ended December 31, 2018 reflecting higher rates on interest
bearing deposits. The decline in the net interest margin was partially offset by incremental fees from loan prepayments.
Our efficiency ratio was 60.2% for the year ended December 31, 2019 compared to 59.2% for the year ended December 31,
2018. The increase in the efficiency ratio was primarily a result of decreased revenues when compared to the year ended December
31, 2018.
2018 Earnings Overview
Our net income for the year ended December 31, 2018 was $17.4 million, an increase of $3.6 million, or 26.1%, compared
to the year ended December 31, 2017. Net income available to common shareholders for the year ended December 31, 2018, was
$17.4 million, or $2.21 per diluted share, compared to net income available to common shareholders of $13.8 million, or $1.78
per diluted share, for the year ended December 31, 2017. Our returns on average shareholders' equity and average assets for the
year ended December 31, 2018, were 10.19% and 0.94%, respectively, compared to 8.93% and 0.80%, respectively for the year
ended December 31, 2017.
The increase in net income for 2018 compared to 2017 was primarily a result of higher net interest income and income tax
expense savings resulting from the tax law change enacted in 2017. Net interest income for the year ended December 31, 2018
was $56.3 million, an increase of $2.0 million compared to the year ended December 31, 2017. Our net interest margin decreased
12 basis points to 3.18% for the year ended December 31, 2018 compared to the year ended December 31, 2017 reflecting higher
rates on interest bearing deposits driven by rate increases in our competitive marketplace.
Our efficiency ratio was 59.2% for the year ended December 31, 2018 compared to 54.9% for the year ended December 31,
2017. The increase in the efficiency ratio was driven by slower growth in net interest income and an increase in noninterest expense
associated with the opening of three new branches during the second quarter of 2018, as well as a number of non-recurring expenses
recognized in the first quarter of 2018 that caused our efficiency ratio to temporarily jump to 62.0%.
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. 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.
37
Year ended December 31, 2019 compared to year ended December 31, 2018
FTE net interest income for the years ended December 31, 2019 and 2018 was $54.0 million and $56.6 million, respectively.
Net interest income decreased due to higher rates on interest bearing deposits.
FTE basis interest income for the year ended December 31, 2019 increased by $2.9 million to $83.2 million, or 4%, compared
to FTE basis interest income for the year ended December 31, 2018 due primarily to fees recognized from elevated loan
prepayments. Loan prepayment fees totaled $2.7 million for the year ended December 31, 2019 compared to $1.3 million for the
same period in 2018. Average interest earning assets were $1.8 billion for the year ended December 31, 2019, decreasing by
$2.6 million, or 0.1%, from the year ended December 31, 2018. The average balance of total loans decreased $2.8 million, or
0.2%. The total average balance of securities for the year ended December 31, 2019 decreased by $6.0 million, or 5%, from the
year ended December 31, 2018. The total yield in earnings assets increased to 4.61% at December 31, 2019, compared to 4.45%
at December 31, 2018. The increase in yield was primarily driven by an increase in income earned resulting from loan prepayments.
Interest expense for the year ended December 31, 2019 increased by $5.4 million, or 23%, compared to interest expense for
2018 due to an increase in rates on interest bearing deposits. Although deposit costs started to decline in the second half of 2019,
the weighted average cost of deposits for all of 2019 increased 40 basis points to 1.87% due to an increase in market rates and our
desire to attract additional deposits. The weighted average cost of borrowed money increased by 32 basis points to 2.53%. Average
interest bearing liabilities for the year ended December 31, 2019 decreased by $7.7 million, or 0.5%, from the year ended
December 31, 2018, primarily due to lower average balances in borrowed money.
Year ended December 31, 2018 compared to year ended December 31, 2017
FTE net interest income for the years ended December 31, 2018 and 2017 was $56.6 million and $55.0 million, respectively.
Net interest income increased due to higher yields and an increase in earning assets offset by higher rates and volume on interest
bearing deposits.
FTE basis interest income for the year ended December 31, 2018 increased by $8.5 million to $80.3 million, or 12%, compared
to FTE basis interest income for the year ended December 31, 2017 due primarily to growth in higher yielding interest earning
assets, specifically, loan growth and yield increases in our commercial real estate and commercial business portfolios. Average
interest earning assets were $1.8 billion for the year ended December 31, 2018, increasing by $115.5 million, or 7%, from the year
ended December 31, 2017. The average balance of total loans increased $112.6 million, or 8%, contributing $7.9 million to the
increase in interest income. The total average balance of securities for the year ended December 31, 2018 increased by $9.5 million,
or 9%, from the year ended December 31, 2017. The total yield in earnings assets increased to 4.45% at December 31, 2018,
compared to 4.25% at December 31, 2017. The increase in yield was primarily driven by an increase in rates on loans and an
increase in income earned resulting from loan prepayments.
Interest expense for the year ended December 31, 2018, increased by $6.9 million, or 41%, compared to interest expense for
2017 due to an increase in volume and increases in rates on interest bearing deposits driven by rate increases in our competitive
marketplace. The weighted average cost of deposits increased 41 basis points to 1.47% due to an increase in market rates and our
desire to attract additional deposits. The weighted average cost of borrowed money increased by 11 basis points to 2.21%. Average
interest bearing liabilities for the year ended December 31, 2018 increased by $106.9 million, or 8%, from the year ended
December 31, 2017, primarily due to higher average balances in money market and savings accounts.
38
Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential
The following table below presents the average balances and yields earned on interest-earning assets and average balances
and weighted average rates paid on our funding liabilities for the years ended December 31, 2019, 2018 and 2017.
Years Ended December 31,
Average
Balance
2019
Interest
Yield/
Rate(5)
Average
Balance
2018
Interest
Yield/
Rate(5)
Average
Balance
2017
Interest
Yield/
Rate(5)
(Dollars in thousands)
Assets:
Cash and fed funds sold. . . . . . . . . . . . . . . $
Securities(1) . . . . . . . . . . . . . . . . . . . . . . . .
Loans:
85,678
$
1,859
2.17 % $
77,923
$
1,428
1.84% $
85,308
$
790
112,336
3,526
3.14
118,311
3,686
3.12
108,775
3,830
Commercial real estate . . . . . . . . . . . . . .
1,067,290
50,818
Residential real estate. . . . . . . . . . . . . . .
Construction(2) . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . .
165,384
85,591
6,367
4,538
255,779
15,599
Consumer . . . . . . . . . . . . . . . . . . . . . . . .
258
17
Total loans . . . . . . . . . . . . . . . . . . . .
1,574,302
77,339
Federal Home Loan Bank stock . . . . . . . .
7,502
473
4.70
3.85
5.23
6.01
6.70
4.85
6.31
1,014,255
47,967
189,121
90,773
7,016
4,667
282,425
15,037
481
28
1,577,055
74,715
9,177
517
4.66
3.71
5.07
5.25
5.88
4.67
5.63
907,223
194,344
107,752
253,868
1,227
41,638
6,983
5,195
12,981
44
1,464,414
66,841
8,486
337
0.93%
3.52
4.53
3.51
4.75
5.04
3.62
4.50
3.97
Total earning assets. . . . . . . . . . . . . . . . .
1,779,818
$ 83,197
4.61 % 1,782,466
$ 80,346
4.45% 1,666,983
$ 71,798
4.25%
Other assets . . . . . . . . . . . . . . . . . . . . . . . .
92,663
Total assets . . . . . . . . . . . . . . . . . . . . . . . $1,872,481
68,002
$1,850,468
60,904
$1,727,887
Liabilities and shareholders’ equity:
Interest bearing liabilities:
NOW. . . . . . . . . . . . . . . . . . . . . . . . . . . . $
62,254
$
128
0.21 % $
60,410
$
157
0.26% $
57,712
$
93
0.16%
Money market. . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . .
Time . . . . . . . . . . . . . . . . . . . . . . . . . . . .
439,867
177,854
637,515
Total interest bearing deposits . . . . .
1,317,490
Borrowed money . . . . . . . . . . . . . . . . . . . .
175,267
7,139
2,968
14,463
24,698
4,489
1.62
1.67
2.27
1.87
2.53
482,886
124,214
619,448
1,286,958
213,546
6,431
1,649
10,714
18,951
4,787
1.33
1.33
1.73
1.47
2.21
404,848
102,915
633,260
1,198,735
194,875
3,427
763
8,411
12,694
4,143
0.85
0.74
1.33
1.03
2.10
Total interest bearing liabilities . . . . . . .
1,492,757
$ 29,187
1.96 % 1,500,504
$ 23,738
1.58% 1,393,610
$ 16,837
1.21%
Noninterest bearing deposits . . . . . . . . . . .
172,192
Other liabilities . . . . . . . . . . . . . . . . . . . . .
29,022
Total liabilities . . . . . . . . . . . . . . . . . . . .
1,693,971
Shareholders’ equity . . . . . . . . . . . . . . . . .
178,510
Total liabilities and shareholders’ equity $1,872,481
Net interest income(3). . . . . . . . . . . . . . . . .
Interest rate spread. . . . . . . . . . . . . . . . . . .
Net interest margin(4) . . . . . . . . . . . . . . . . .
166,566
12,374
1,679,444
171,024
$1,850,468
169,250
10,098
1,572,958
154,929
$1,727,887
$ 54,010
$ 56,608
$ 54,961
2.65 %
3.03 %
2.87%
3.18%
3.04%
3.30%
(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 $249 thousand, $282 thousand and $597 thousand, respectively, for the years ended
December 31, 2019, 2018 and 2017. Tax exempt income was converted to a fully taxable equivalent basis at a 20 percent tax rate for 2019 and 2018 and a
30 percent tax rate for 2017.
(4) Net interest income as a percentage of total earning assets.
(5) Yields are calculated using the contractual day count convention for each respective product type.
39
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, 2019 vs 2018
Increase (Decrease)
Year Ended
December 31, 2018 vs 2017
Increase (Decrease)
Volume
Rate
Total
Volume
Rate
Total
(In thousands)
Interest and dividend income:
Cash and fed funds sold . . . . . . . . . . . . . . . . . . . . . . . $
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans:
152
(187)
Commercial real estate . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock. . . . . . . . . . . . . . . . .
Total change in interest and dividend income. . . . $
2,523
(906)
(272)
(1,498)
(15)
(168)
(101)
(304) $
Interest expense:
Deposits:
$
279
$
27
328
257
143
2,060
4
2,792
57
3,155
$
$
431
(160)
(74) $
319
$
712
(463)
638
(144)
2,851
(649)
(129)
562
(11)
2,624
(44)
2,851
5,031
(190)
(857)
1,504
(35)
5,453
29
1,298
223
329
552
19
2,421
151
6,329
33
(528)
2,056
(16)
7,874
180
$
5,727
$
2,821
$
8,548
NOW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Money market . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowed money . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total change in interest expense . . . . . . . . . . . . . .
Change in net interest income . . . . . . . . . . . . . . . . . . $
5
(609)
827
321
544
(925)
(381)
77
$
(34) $
1,317
492
3,428
5,203
627
5,830
(29) $
708
1,319
3,749
5,747
(298)
5,449
$ (2,675) $ (2,598) $
5
$
59
$
64
756
184
(187)
758
411
2,248
702
2,490
5,499
233
1,169
4,558
5,732
$ (2,911) $
3,004
886
2,303
6,257
644
6,901
1,647
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.
The provision for loan losses for the year ended December 31, 2019 was $0.4 million compared to a $3.4 million provision
for loan losses for the year ended December 31, 2018. The decrease in the provision for loan losses was largely driven by a decline
in loan charge-offs in 2019 when compared to 2018.
40
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, income earned on bank owned life insurance
and gains on sales of investment securities. The following table compares noninterest income for the years ended December 31,
2019, 2018 and 2017.
Years Ended
December 31,
2019/2018
Change
2018/2017
Change
2019
2018
2017
$
%
$
%
(Dollars in thousands)
Gains and fees from sales of loans. . . . . . . . . . . . . . . . $ 1,791
Service charges and fees . . . . . . . . . . . . . . . . . . . . . . .
1,023
Bank owned life insurance. . . . . . . . . . . . . . . . . . . . . .
Net gain on sale of available for sale securities. . . . . .
Loss on sale of other real estate owned, net. . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,448
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . $ 5,244
1,008
76
(102)
$
984
$ 1,427
$
1,090
1,057
222
—
547
1,007
1,170
165
(78)
938
807
(67)
(49)
(146)
(102)
901
$ 3,900
$ 4,629
$ 1,344
82% $ (443)
(6)
83
(5)
(113)
(66)
57
N/A
78
(391)
34% $ (729)
165
(31)%
8
(10)
35
(100)
(42)
(16)%
Year ended December 31, 2019 compared to year ended December 31, 2018
Noninterest income totaled $5.2 million for the year ended December 31, 2019, compared to $3.9 million for the year ended
December 31, 2018. The increase in noninterest income was primarily driven by an increase in gains and fees from the sales of
loans and to a lesser degree loan related interest rate swap fees recorded in other income.
Gains and fees from sales of loans. During the year ended December 31, 2019, the Company recorded $1.8 million in gains
and fees from sales of loans. For the year ended December 31, 2018, gains and fees from sales of loans totaled $1.0 million. The
increase was driven by a higher volume of loans sold for the year ended December 31, 2019 compared to the same period in 2018.
Other. We recorded other income of $1.4 million during the year ended December 31, 2019, an increase of $0.9 million
compared to the year ended December 31, 2018. The increase is primarily related to loan related interest rate swap fees.
Year ended December 31, 2018 compared to year ended December 31, 2017
Noninterest income totaled $3.9 million for the year ended December 31, 2018, compared to $4.6 million for the year ended
December 31, 2017. The decrease in noninterest income was primarily driven by a decline in gains and fees from sales of loans
and other income.
Gains and fees from sales of loans. The Company recorded $1.0 million in gains and fees from sales of loans for the year
ended December 31, 2018, a decrease of $0.4 million compared to the year ended December 31, 2017. The decrease is primarily
driven by the absence of refining the model assumptions used in calculating a servicing asset in 2017, partially offset by an increase
in the gains realized on the sale of loans in 2018 as compared to 2017.
Other. We recorded other income of $0.5 million for the year ended December 31, 2018, a decrease of $0.4 million compared
to the year ended December 31, 2017. The decrease is primarily related to a valuation allowance on servicing assets of $0.2 million
recognized in the fourth quarter of 2018 and increased amortization on servicing assets.
41
Noninterest Expense
The following table compares noninterest expense for the years ended December 31, 2019, 2018 and 2017.
Years Ended
December 31,
2019/2018
Change
2018/2017
Change
2019
2018
2017
$
%
$
%
(Dollars in thousands)
2,067
Salaries and employee benefits. . . . . . . . . . . . . . . . $ 19,434
Occupancy and equipment . . . . . . . . . . . . . . . . . . .
7,594
Data processing. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional services. . . . . . . . . . . . . . . . . . . . . . . .
Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangibles . . . . . . . . . . . . . . . . . .
FDIC insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,691
Total noninterest expense . . . . . . . . . . . . . . . . . . . $ 35,626
1,857
971
863
75
74
$ 18,973
$ 16,284
$
6,790
2,033
2,103
1,587
1,044
92
779
2,232
6,165
1,866
2,072
1,193
912
118
1,116
2,797
$ 35,633
$ 32,523
$
461
804
34
(246)
(616)
(181)
(17)
(705)
459
(7)
2 % $ 2,689
12
2
(12)
(39)
625
167
31
394
(17)
(18)
132
(26)
(337)
(565)
— % $ 3,110
21
(91)
17%
10
9
1
33
14
(22)
(30)
(20)
10%
Year ended December 31, 2019 compared to year ended December 31, 2018
Noninterest expense remained flat, totaling $35.6 million for the years ended December 31, 2019 and 2018.
Salaries and employee benefits. Salaries and employee benefits increased by $0.5 million, or 2%, for the year ended
December 31, 2019 compared to the year ended December 31, 2018, largely reflecting an increase in full time equivalent employees
and a reduction in deferred loan origination costs. Average full time equivalent employees totaled 150 in 2019 compared to 144
in 2018.
Occupancy and equipment. Occupancy and equipment expense increased by $0.8 million, or 12%, for the year ended
December 31, 2019, compared to the year ended December 31, 2018. The increase was primarily associated with a full year of
expenses from the prior year's branch expansion and additional investment in technology.
FDIC Insurance. FDIC insurance expense decreased $0.7 million for the year ended December 31, 2019 compared to the
same period in 2018 driven by a credit received during the quarter ended September 30, 2019.
Year ended December 31, 2018 compared to year ended December 31, 2017
Noninterest expense was $35.6 million for the year ended December 31, 2018, compared to $32.5 million for the year ended
December 31, 2017. The increase of $3.1 million, or 10%, was primarily driven by an increase in salaries and employee benefits
and occupancy and equipment expenses.
Salaries and employee benefits. Salaries and employee benefits increased by $2.7 million, or 17%, for the year ended
December 31, 2018 compared to the year ended December 31, 2017, largely reflecting an increase in full time equivalent employees
and a reduction in deferred loan origination costs as a result of lower loan volume. The increase in full time equivalent employees
is in line with year over year business growth and driven by staffing for the three new branch locations. Average full time equivalent
employees totaled 144 in 2018 compared to 134 in 2017.
Occupancy and equipment. Occupancy and equipment expense increased by $0.6 million, or 10%, for the year ended
December 31, 2018 compared to the year ended December 31, 2017. The increase in occupancy and equipment expense was
primarily driven by expenditures associated with the opening of the new branch locations and improvements of existing
infrastructure.
42
Income Taxes
Income tax expense for the years ended December 31, 2019, 2018 and 2017 totaled $4.7 million, $3.7 million and
$11.3 million, respectively. The effective tax rates for the years ended December 31, 2019, 2018 and 2017, were 20.6%, 17.6%
and 45.0%, respectively. The decrease in the effective tax rate for the year ended December 31, 2018 was primarily due to the tax
law change enacted in 2017.
Our net deferred tax asset at December 31, 2019, was $5.8 million, compared to $4.3 million, at December 31, 2018. The
increase in the deferred tax asset at December 31, 2019 is primarily a result of unrealized losses on derivatives.
On October 8, 2015, the Bank established a new wholly-owned subsidiary, Bankwell Loan Servicing Group, Inc. (a Passive
Investment Company “PIC”). The PIC was organized in accordance with Connecticut statutes to hold and manage certain loans
that are collateralized by real estate. Income earned by the PIC is exempt from Connecticut income tax and any dividends paid
by the PIC to the Bank are not taxable income for Connecticut income tax purposes. See Note 13 to our Consolidated Financial
Statements for further information regarding income taxes.
Financial Condition
Summary
Total assets and gross loans remained relatively flat for the period ended December 31, 2019 when compared to the same
period in 2018, totaling $1.9 billion and $1.6 billion, respectively. However, gross loans grew at an annualized rate of 10% during
the fourth quarter of 2019 when compared to the third quarter of 2019.
Total liabilities also remained relatively flat at December 31, 2019 when compared to the same period in 2018, totaling $1.7
billion. However, deposits grew at an annualized rate of 6% during the fourth quarter of 2019 when compared to the third quarter
of 2019, which includes strong growth in noninterest bearing deposits. Shareholders’ equity totaled $182.4 million at December 31,
2019, an increase of $8.2 million compared to December 31, 2018, largely due to net income for the year ended December 31,
2019 of $18.2 million, offset by dividends paid of $4.1 million, stock repurchases of $1.0 million and a $6.5 million unfavorable
impact to accumulated other comprehensive income, driven by fair value marks related to hedge positions involving interest rate
swaps. The interest rate swaps are primarily used to hedge interest rate risk in relation to our funding sources. The Company's
current derivative positions will cause a decrease in other comprehensive income in a falling interest rate environment and an
increase in a rising interest rate environment. The Bank exceeded the regulatory minimum capital levels to be considered well-
capitalized with total risk-based capital of 13.35%, tier 1 risk-based capital of 12.53% and tier 1 capital to average assets ratio of
10.99% at December 31, 2019.
Loan Portfolio
We originate commercial real estate loans, construction loans, commercial business loans and other consumer loans. 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. Our loan portfolio is the largest category of our earnings assets.
The following table compares the composition of our loan portfolio for the dates indicated:
2019
2018
Total
%
Total
%
Change
Total
(Dollars in thousands)
Real estate loans:
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
150
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,604,484
147,109
1,128,614
98,583
1,374,306
230,028
9.17% $
178,079
11.10% $
70.34
6.14
85.65
14.34
0.01
1,094,066
73,191
1,345,336
258,978
412
68.18
4.56
83.84
16.14
0.02
100.00% $ 1,604,726
100.00% $
(30,970)
34,548
25,392
28,970
(28,950)
(262)
(242)
Primary loan categories
Residential real estate. Residential real estate loans decreased by $31.0 million, or 17.4%, at December 31, 2019 compared
to December 31, 2018 and amounted to $147.1 million, representing 9% of total loans at December 31, 2019. In the fourth quarter
of 2017, management made the strategic decision to no longer originate residential mortgage loans.
43
Commercial real estate. Commercial real estate loans were $1.1 billion and represented 70% of our total loan portfolio at
December 31, 2019, a net increase of $34.5 million, or 3.2%, from December 31, 2018. Commercial real estate loan growth during
this period largely reflects strong production from experienced relationship managers in the marketplace and their ability to source
quality opportunities, and enhanced lending to existing customers. Commercial real estate loans are secured by a variety of property
types, including office buildings, retail facilities, commercial mixed use and multi-family dwellings.
Construction. Construction loans were $98.6 million at December 31 2019, up $25.4 million from December 31, 2018.
Construction loans totaled $73.2 million at December 31, 2018. Commercial construction loans consist of commercial development
projects, such as apartment buildings and condominiums, as well as office buildings, retail and other income producing properties
and land loans.
Commercial business. Commercial business loans were $230.0 million and represented 14% of our total loan portfolio at
December 31, 2019, compared to $259.0 million and 16% of the total portfolio at December 31, 2018. Commercial business loans
primarily 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.
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.
The following table presents an analysis of the maturity of our commercial real estate, commercial construction and commercial
business loan portfolios as of December 31, 2019.
Amounts due:
One year or less. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
32,828
$
16,500
$
25,108
$
74,436
After one year:
December 31, 2019
Commercial
Real Estate
Commercial
Construction
Commercial
Business
Total
(In thousands)
One to five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total due after one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,095,786
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,128,614
478,156
617,630
63,440
18,643
82,083
108,488
96,432
650,084
732,705
204,920
1,382,789
$
98,583
$
230,028
$ 1,457,225
The following table presents an analysis of the interest rate sensitivity of our commercial real estate, commercial construction
and commercial business loan portfolios due after one year as of December 31, 2019.
December 31, 2019
Adjustable
Interest Rate
Fixed Interest
Rate
Total
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans due after one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
313,473
32,330
123,475
469,278
(In thousands)
782,313
$
49,753
81,445
913,511
$
$ 1,095,786
82,083
204,920
$ 1,382,789
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 Directors' Loan Committee ("DLC") and the Audit Committee.
The DLC 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 procedures to monitor the credit quality of our loan portfolio and the loan review program. 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 as a result of general economic
weakness, such as a prolonged downturn in the housing market on a regional or national scale. Decreases in real estate values
44
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 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 no longer originate residential mortgage loans. At the
beginning of the third quarter of 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 risk management involves a partnership between our relationship managers and our credit approval, portfolio
management, 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. 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 loans' contractually required payments over the cash flows expected to be collected is the nonaccretable difference.
As such, charge-offs 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 table presents nonperforming assets and additional asset quality data for the dates indicated:
At December 31,
2019
2018
2017
2016
2015
(Dollars in thousands)
Nonaccrual loans:
Real estate loans:
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total nonaccrual loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property acquired through foreclosure or repossession, net .
—
Total nonperforming assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,588
1,560
5,222
3,806
—
$
3,812
$
1,590
$
1,612
$
1,365
5,950
4,320
—
—
3,371
520
—
5,481
—
446
538
341
2,937
272
1,264
1,160
2
3,791
1,248
$ 14,082
$
5,481
$
3,209
$
5,039
10,588
14,082
Nonperforming assets to total assets . . . . . . . . . . . . . . . . . . .
Nonperforming loans to total loans . . . . . . . . . . . . . . . . . . . .
Total past due loans to total loans . . . . . . . . . . . . . . . . . . . . .
0.56%
0.66%
0.77%
0.75%
0.88%
0.78%
0.31%
0.36%
1.67%
0.20%
0.22%
0.47%
0.38%
0.33%
0.51%
45
Nonperforming assets and Nonaccrual loans totaled $10.6 million and represented 0.56% of total assets at December 31,
2019, compared to $14.1 million and 0.75% of total assets at December 31, 2018. The Company continues to work on the resolution
of the previously disclosed large nonperforming lending relationship. Progress to date has been in line with the Company's estimates
and, during the fourth quarter of 2019, the Company submitted a claim to the Small Business Administration ("SBA") to recover
the remaining balance of $1.9 million, representing 10 basis points of the total nonperforming assets to total assets ratio of 0.56%.
The allowance for loan losses was $13.5 million, representing 0.84% of total gross loans at December 31, 2019 and $15.5 million,
representing 0.96% of total gross loans at December 31, 2018. There was no other real estate owned at December 31, 2019 or
2018.
Nonaccrual Loans. Loans greater than 90 days past due are put on nonaccrual status (excluding certain acquired credit
impaired loans). 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 payments
are recognized on a cash basis or principal recapture basis depending on a number of factors including probability of collection
and if impairment 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. At December 31, 2019 and 2018, there were no commitments to lend additional
funds to any borrower on nonaccrual status.
Past Due Loans. 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.
The following table presents past due loans as of December 31, 2019 and 2018:
30–59 Days
Past Due
60–89 Days
Past Due
90 Days or
Greater Past
Due
Total Past Due
(In thousands)
As of December 31, 2019
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
As of December 31, 2018
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $
943
$
281
$
355
1,357
—
1,712
994
668
—
$
$
—
—
—
943
$
— $
133
1
5,935
—
3,455
9,671
2,203
4,386
4,076
$
$
1,224
6,290
1,357
3,455
12,326
3,197
5,187
4,077
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,662
$
134
$
10,665
$
12,461
Troubled Debt Restructurings (TDR). Loans are considered restructured in a troubled debt restructuring when the borrower
is experiencing financial difficulties and the Bank has 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.
46
Restructured loans are classified as accruing or nonaccruing 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 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. At December 31, 2019 and December 31, 2018
there were three nonaccrual loans identified as TDRs totaling $1.6 million and six nonaccrual loans identified as TDRs totaling
$3.6 million, respectively.
The following table presents information on troubled debt restructured loans:
2019
2018
2017
2016
2015
At December 31,
(In thousands)
Accruing troubled debt restructured loans:
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accruing troubled debt restructured loans . . . . . . . . . . .
2,460
$
2,722
$
2,957
$
69
$
4,952
524
7,936
37
923
3,682
51
1,346
4,354
402
893
1,364
Nonaccrual troubled debt restructured loans:
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonaccrual troubled debt restructured loans . . . . . . . . .
943
$
3,008
$
— $
— $
—
680
1,623
334
217
3,559
334
219
553
—
66
66
Total troubled debt restructured loans . . . . . . . . . . . . $
9,559
$
7,241
$
4,907
$
1,430
$
944
4,518
779
6,241
—
970
90
1,060
7,301
As of December 31, 2019 and 2018, loans classified as troubled debt restructurings totaled $9.6 million and $7.2 million,
respectively.
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. 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. Potential problem loans are assessed for loss exposure using the methods described in Note 5 to our Consolidated Financial
Statements under the caption “Credit Quality Indicators”.
We expect the levels of nonperforming 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.
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, the Bank’s and peer banks’ historical
loss experience, 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 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
47
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 following table presents the activity in our allowance for loan losses and related ratios for the dates indicated:
2019
2018
2017
2016
2015
At December 31,
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . $ 15,462
Charge-offs:
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(875)
(594)
—
(897)
(75)
(2,441)
Recoveries:
—
—
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recoveries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51
(2,390)
Net (charge-offs) recoveries. . . . . . . . . . . . . . . . . . . . . . . . . .
Provision charged to earnings . . . . . . . . . . . . . . . . . . . . . . . .
437
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,509
Net charge-offs (recoveries) to average loans . . . . . . . . . . . .
Allowance for loan losses to total loans . . . . . . . . . . . . . . . .
32
19
0.15%
0.84%
(Dollars in thousands)
$ 18,904
$ 17,982
$ 14,169
$ 10,860
(420)
(5,614)
—
(815)
(77)
(6,926)
—
18
7
19
44
(6,882)
3,440
—
—
—
(521)
(51)
(572)
146
—
3
4
153
(419)
1,341
—
—
(7)
(69)
(35)
(111)
—
—
10
—
10
(101)
3,914
—
—
—
(15)
(15)
(30)
—
—
9
100
109
79
3,230
$ 15,462
$ 18,904
$ 17,982
$ 14,169
0.44%
0.96%
0.03%
1.23%
0.01%
1.32%
(0.01)%
1.23 %
At December 31, 2019, our allowance for loan losses was $13.5 million and represented 0.84% of total loans, compared to
$15.5 million and 0.96% of total loans at December 31, 2018. The decrease in the ratio of allowance for loan losses to total loans
is driven by improving historical loss trends in the peer group data used in our allowance for loan losses model. For the years
ended December 31, 2019, 2018 and 2017, the provision for loan losses charged to earnings totaled $0.4 million, $3.4 million and
$1.3 million, respectively. Net charge-offs for the year ended December 31, 2019 were $2.4 million and represented 0.15% of
average loans. For the year ended December 31, 2018, net charge-offs were $6.9 million and represented 0.44% of average loans,
primarily reflecting $5.6 million of charge-offs of commercial real estate loans. The decrease in net charge-offs was primarily a
result of a charge-off totaling $6.2 million recognized in the fourth quarter of 2018 attributable to one lending relationship.
The carrying amount of total impaired loans at December 31, 2019 was $22.6 million. This compares to a carrying amount
of $19.1 million for total impaired loans at December 31, 2018. The amount of allowance for loan losses related to impaired loans
was $0.5 million and $0.4 million, respectively, at December 31, 2019 and 2018.
48
The following table presents the allocation of the allowance for loan losses and the percentage of the related loan segments
to total loans:
2019
2018
At December 31,
2017
2016
2015
Percent of
Loan
Portfolio
Amount
Percent of
Loan
Portfolio
Amount
Percent of
Loan
Portfolio
Amount
Percent of
Loan
Portfolio
Amount
Percent of
Loan
Portfolio
Amount
(Dollars in thousands)
Residential
real estate . . . . $
Commercial
real estate . . . .
Construction . .
Commercial
business . . . . .
Consumer . . . .
730
9.17% $
857
11.10% $ 1,721
12.54% $ 1,802
14.33% $ 1,618
16.83%
10,551
324
1,903
1
70.34
6.14
14.34
0.01
11,562
140
2,902
1
68.18
4.56
16.14
0.02
12,777
907
3,498
1
63.98
6.59
16.85
0.04
9,415
2,105
4,283
377
61.89
7.86
15.81
0.11
7,705
1,504
3,334
8
60.79
7.17
15.06
0.15
Total
allowance for
loan losses . . $ 13,509
100.00% $ 15,462
100.00% $ 18,904
100.00% $ 17,982
100.00% $ 14,169
100.00%
The allocation of the allowance for loan losses at December 31, 2019 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, 2019 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. Investments are designated as either
marketable equity, available for sale, held to maturity or trading securities 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. Marketable equity securities are
reported at fair value, with any changes in fair value recognized in earnings.
The amortized cost and fair value of investment securities as of the dates indicated are presented in the following table:
2019
At December 31,
2018
2017
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Marketable equity securities. . . . . . . . . . . . . . . $
Securities available for sale:. . . . . . . . . . . . . . .
U.S. Government and agency obligations . . .
State agency and municipal obligations. . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . .
2,047
$
2,118
$
2,003
$
2,009
$
— $
—
(In thousands)
81,263
82,439
—
—
—
—
83,815
4,023
7,061
82,136
4,007
7,011
73,024
11,959
7,096
72,774
12,277
7,137
Total securities available for sale . . . . . . . $
81,263
$
82,439
$
94,899
$
93,154
$
92,079
$
92,188
Securities held to maturity:
State agency and municipal obligations. . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . .
Government mortgage-backed securities. . . .
16,231
18,222
—
77
—
85
20,328
1,000
93
20,890
1,000
98
20,465
1,000
114
21,717
995
124
Total securities held to maturity . . . . . . . . $
16,308
$
18,307
$
21,421
$
21,988
$
21,579
$
22,836
At December 31, 2019, the carrying value of our investment securities portfolio totaled $100.9 million and represented 5%
of total assets, compared to $116.6 million and 6% of total assets at December 31, 2018. The decrease of $15.7 million primarily
49
reflects sales, principal payments and calls of state agency and municipal obligations and corporate bonds. We purchase investment
grade securities with a focus on liquidity, earnings and duration exposure.
The net unrealized gain position on our investment portfolio at December 31, 2019 was $3.2 million and included gross
unrealized losses of $2.0 thousand. The net unrealized loss position on our investment portfolio at December 31, 2018 was
$1.2 million and included gross unrealized losses of $1.9 million. The gross unrealized losses at December 31, 2018 were
concentrated in U.S. Government and agency obligations. At December 31, 2019, we determined that there had been no deterioration
in credit quality subsequent to purchase and believe that all unrealized losses are temporary. All of our investment securities are
rated investment grade or deemed to be of investment grade quality.
The following tables summarize the amortized cost and weighted average yield of securities in our investment securities
portfolio as of December 31, 2019 and 2018, 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, 2019
Amortized
Cost
Yield
Amortized
Cost
Yield
Amortized
Cost
Yield
Amortized
Cost
Yield
Due Within 1 Year
Due 1–5 Years
Due 5–10 Years
Due After 10 Years or No
Contractual Maturity
(Dollars in thousands)
Marketable equity securities. . . . $
—
—% $
—
—% $
—
—% $
2,047
2.20%
Securities available for sale:
U.S. Government and agency
obligations . . . . . . . . . . . . . . . .
Total securities available
for sale . . . . . . . . . . . . . . . . $
Securities held to maturity:
State agency and municipal
obligations . . . . . . . . . . . . . . . . $
Government mortgage-backed
securities . . . . . . . . . . . . . . . . .
Total securities held to
maturity . . . . . . . . . . . . . . . $
2,100
1.59
9,950
2.02
8,311
2.87
60,902
2.61
2,100
1.59% $
9,950
2.02% $
8,311
2.87% $
60,902
2.61%
—
—
—
—% $
—
—% $
—
—
—
—% $
—
—% $
—
—
—
—% $
16,231
5.05%
—
77
5.35
—% $
16,308
5.05%
At December 31, 2018
Amortized
Cost
Yield
Amortized
Cost
Yield
Amortized
Cost
Yield
Amortized
Cost
Yield
Due Within 1 Year
Due 1–5 Years
Due 5–10 Years
Due After 10 Years or No
Contractual Maturity
(Dollars in thousands)
Marketable equity securities. . . . $
—
—% $
—
—% $
—
—% $
2,003
2.09%
Securities available for sale:
U.S. Government and agency
obligations . . . . . . . . . . . . . . . .
State agency and municipal
obligations . . . . . . . . . . . . . . . .
Corporate bonds. . . . . . . . . . . .
Total securities available
for sale . . . . . . . . . . . . . . . . $
Securities held to maturity:
State agency and municipal
obligations . . . . . . . . . . . . . . . . $
Corporate bonds. . . . . . . . . . . .
Government mortgage-backed
securities . . . . . . . . . . . . . . . . .
Total securities held to
maturity . . . . . . . . . . . . . . . $
1,000
1.40
12,025
—
—
—
—
2,234
7,061
1.94
2.36
2.46
100
1,261
—
2.50
3.43
—
70,690
528
—
2.60
2.82
—
1,000
1.40% $
21,320
2.16% $
1,361
3.36% $
71,218
2.60%
—% $
—
—
—% $
—
—
—
—
— $
16,434
—
—
—
93
5.06%
—
5.35
—% $
16,527
5.06%
3,894
1,000
—
4.21% $
2.23
—
4,894
3.81% $
—
—
—
—
50
Bank Owned Life Insurance ("BOLI")
BOLI amounted to $41.7 million as of December 31, 2019. 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. 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, FHLB borrowings, subordinated debt and proceeds
from the sales, maturities and payments of loans and investment securities.
Total deposits represented 79% of our total assets at December 31, 2019. While scheduled loan and securities repayments
are a relatively stable sources 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 management team 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,
we also execute one-way buy transactions. CDARS deposits, except for reciprocal deposits, are considered to be brokered deposits
for bank regulatory purposes.
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,
2019
2018
Amount
Percent
Weighted
Average
Rate
Amount
Percent
Weighted
Average
Rate
Noninterest-bearing demand . . . . . . . . . . . . . . $ 191,518
70,020
NOW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market . . . . . . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
627,141
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . $1,491,903
419,495
183,729
(Dollars in thousands)
12.84%
—% $ 173,198
11.53%
—%
4.69
28.12
12.31
42.04
0.21
1.62
1.67
2.27
61,869
471,968
180,487
614,722
4.12
31.42
12.01
40.92
0.26
1.33
1.33
1.73
100.00%
1.87% $1,502,244
100.00%
1.47%
Total deposits were $1.5 billion at December 31, 2019, a decrease of $10.3 million, or 1%, from December 31, 2018. However,
deposits grew at an annualized rate of 6% during the final quarter of 2019, which includes strong growth in noninterest bearing
deposits.
Brokered certificates of deposits ("Brokered CDs") totaled $179.8 million and $91.8 million at December 31, 2019 and 2018,
respectively. Certificates of deposits from national listing services totaled $21.3 million at December 31, 2019 and $101.5 million
at December 31, 2018. Brokered money market accounts totaled $39.9 million and $84.9 million at December 31, 2019 and 2018,
respectively. Brokered deposits represent brokered certificates of deposit, brokered money market accounts and one way Certificate
of Deposit Account Registry Service (CDARS). Brokered deposits are utilized as an additional source of funding.
51
At December 31, 2019 and 2018, time deposits, including CDARS and brokered deposits, with a denomination of
$100 thousand or more totaled $502.8 million and $493.8 million, respectively, maturing during the periods indicated in the table
below:
Maturing:
At December 31,
2019
2018
(In thousands)
Within 3 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 114,636
After 3 but within 6 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
139,852
After 6 months but within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After 1 year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
143,907
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 502,750
104,355
$ 107,516
136,494
102,722
147,062
$ 493,794
The Bank is a member of the FHLB, which is part of a twelve district Federal Home Loan Bank System. Members are required
to own capital stock of the FHLB, and borrowings are collateralized by qualifying assets not otherwise pledged. The maximum
amount of credit that the FHLB 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, 2019.
We utilize advances from the FHLB as part of our overall funding strategy, to meet short-term liquidity needs and to a lesser
degree manage interest rate risk arising from the difference in asset and liability maturities. Total FHLB advances were $150.0
million at December 31, 2019 compared to $160.0 million at December 31, 2018. The decrease of $10.0 million reflects normal
fluctuations in our borrowings.
Advances from the FHLB include short-term advances with original maturity dates of one year or less. The following table
sets forth certain information concerning short-term FHLB advances as of and for the periods indicated in the following table:
As of and for the period ending:
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
Average amount outstanding during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 145,921
Amount outstanding at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
150,000
Highest month end balance during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average interest rate at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average interest rate during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
150,000
1.97%
1.93%
$ 163,419
$ 144,800
135,000
174,000
2.55%
1.76%
174,000
175,000
1.44%
1.54%
On August 19, 2015, the Company completed a private placement of $25.5 million in aggregate principal amount of fixed
rate subordinated notes (the “Notes”) to certain institutional investors. The Notes are non-callable for five years, have a stated
maturity of August 15, 2025, and bear interest at a quarterly pay fixed rate of 5.75% per annum to the maturity date or the early
redemption date (August 2020 and annually thereafter).
Derivative Instruments
The Company uses interest rate swap instruments to fix the interest rate on short-term FHLB borrowings or Brokered CDs,
all of which are designated as cash flow hedges. The hedge strategy converts the rate of interest on short-term rolling FHLB
advances or Brokered CDs to long-term fixed interest rates, thereby protecting the Bank from interest rate variability.
Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain loan
customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk
management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes
with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate
derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both
the customer derivatives and the offsetting derivatives are recognized directly in earnings.
At December 31, 2019, the Company held derivative financial instruments with a total notional amount of $265.0 million.
52
Information about derivative instruments at December 31, 2019 and 2018 was as follows:
December 31, 2019:
Notional
Amount
Original
Maturity
Maturity Date
Received
Paid
(Dollars in thousands)
Fair Value
Asset
(Liability)
Derivatives designated as
hedging instruments:
Interest rate swap. . . . . . . . . . . . . $
25,000
5.0 years
Interest rate swap. . . . . . . . . . . . .
25,000
5.0 years
Interest rate swap. . . . . . . . . . . . .
25,000
5.0 years
Interest rate swap. . . . . . . . . . . . .
25,000
7.0 years
Interest rate swap. . . . . . . . . . . . .
25,000
7.0 years
Interest rate swap. . . . . . . . . . . . .
25,000
15.0 years
January 1, 2020
August 26, 2020
July 1, 2021
August 25. 2024
August 25. 2024
January 1, 2034
Interest rate swap. . . . . . . . . . . . .
Forward-starting interest rate
swap(1) . . . . . . . . . . . . . . . . . . . . .
Forward-starting interest rate
swap(1) . . . . . . . . . . . . . . . . . . . . .
25,000
3.0 years
December 23, 2022
25,000
15.0 years
25,000
15.0 years
$ 225,000
January 1, 2035
August 26, 2035
Derivatives not designated as
hedging instruments:(2)
Interest rate swap. . . . . . . . . . . . . $
20,000
20.0 years
Interest rate swap. . . . . . . . . . . . .
20,000
20.0 years
$
40,000
March 10, 2039
March 10, 2039
Total Derivatives . . . . . . . . . . . . . $ 265,000
3-month
LIBOR
3-month
LIBOR
3-month
LIBOR
3-month
LIBOR
3-month
LIBOR
3-month
LIBOR
3-month
LIBOR
3-month
LIBOR
3-month
LIBOR
1-month
LIBOR
1-month
LIBOR
1.83%
$
1.48%
1.22%
2.04%
2.04%
—
51
174
(396)
(402)
3.01%
(3,328)
1.28%
279
3.03%
(3,557)
3.05%
(3,512)
$ (10,691)
5.00%
$ (1,762)
5.00%
1,762
—
$
$ (10,691)
(1) The effective date of the forward-starting interest rate swaps listed above are January 2, 2020 and August 26, 2020, respectively.
(2) Represents an interest rate swap with a commercial banking customer, which is offset by a derivative with a third party.
53
December 31, 2018:
Notional
Amount
Original
Maturity
Maturity Date
Received
Paid
(Dollars in thousands)
Fair Value
Asset
(Liability)
Derivatives designated as
hedging instruments:
Interest rate swap. . . . . . . . . . . . . . . $
25,000
4.7 years
Interest rate swap. . . . . . . . . . . . . . .
25,000
5.0 years
Interest rate swap. . . . . . . . . . . . . . .
25,000
5.0 years
Interest rate swap. . . . . . . . . . . . . . .
25,000
5.0 years
Interest rate swap. . . . . . . . . . . . . . .
25,000
7.0 years
Interest rate swap. . . . . . . . . . . . . . .
Forward-starting interest rate
swap(1) . . . . . . . . . . . . . . . . . . . . . . .
Forward-starting interest rate
swap(1) . . . . . . . . . . . . . . . . . . . . . . .
Forward-starting interest rate
swap(1) . . . . . . . . . . . . . . . . . . . . . . .
25,000
7.0 years
25,000
15.0 years
25,000
15.0 years
January 1, 2019
January 1, 2020
August 26, 2020
July 1, 2021
August 25, 2024
August 25, 2024
January 1, 2034
January 1, 2035
15.0 years
August 26, 2035
25,000
$ 225,000
3-month
LIBOR
3-month
LIBOR
3-month
LIBOR
3-month
LIBOR
3-month
LIBOR
3-month
LIBOR
3-month
LIBOR
3-month
LIBOR
3-month
LIBOR
1.62%
$
1
1.83%
1.48%
1.22%
2.04%
2.04%
3.01%
3.03%
3.05%
220
475
828
675
668
(807)
(819)
(811)
430
$
(1) The effective date of the forward-starting interest rate swaps listed above are January 2, 2019, January 2, 2020 and August 26, 2020,
respectively.
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., FHLB term advances and other borrowings), cash flows from our
investment securities portfolios, loan sales, 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.
The Bank’s liquidity position is monitored daily by management. The Asset Liability Committee, or ALCO, establishes
guidelines to ensure maintenance of prudent levels of liquidity. ALCO reports to the Company’s 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 unsecured
borrowing capacity with the Atlantic Community Bankers Bank (ACBB) (formerly Bankers’ Bank Northeast), Zion’s Bank and
Texas Capital Bank and also maintains additional collateralized borrowing capacity with the FHLB in excess of levels used in the
ordinary course of business. Our sources of liquidity include cash, unpledged investment securities, borrowings from the FHLB,
lines of credit from ACBB, Zion's Bank and Texas Capital Bank, the brokered deposit market and national CD listing services.
Capital Resources
Shareholders’ equity totaled $182.4 million as of December 31, 2019, an increase of $8.2 million compared to December 31,
2018, primarily a result of net income for the year ended December 31, 2019 of $18.2 million. The increase was partially offset
by a $6.5 million unfavorable impact to accumulated other comprehensive income driven by fair value marks related to hedge
positions involving interest rate swaps, as well as dividends paid of $4.1 million and common stock repurchases of $1.0 million.
The marks on the interest rate swaps are driven by lower long-term market interest rates in 2019 when compared to 2018. The
54
Company's interest rate swaps are primarily used to hedge interest rate risk in relation to our funding sources. 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. As of December 31, 2019, the tangible common equity ratio and tangible book value
per share were 9.56% and $23.15, 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. At December 31, 2019, 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. At December 31, 2019, the Bank’s ratio of total common equity tier 1 capital to risk-
weighted assets was 12.53%, total capital to risk-weighted assets was 13.35%, Tier 1 capital to risk-weighted assets was 12.53%
and Tier 1 capital to average assets was 10.99%.
In July 2013, the Federal Reserve published Basel III rules establishing a new comprehensive capital framework of U.S.
banking organizations. Under the rules, effective January 1, 2015 for the Company and Bank, the minimum capital ratios became
a) 4.5% “Common Equity Tier 1” to risk-weighted assets, b) 6.0% Tier 1 capital to risk weighted assets and c) 8.0% total capital
to risk-weighted assets. In addition, the new regulations imposed certain limitations on dividends, share buy-backs, discretionary
payments on Tier 1 instruments and discretionary bonuses to executive officers if the banking organization does not hold a "capital
conservation buffer" consisting of 2.5% of common equity to risk weighted assets, in addition to the amounts necessary to meet
the minimum risk-based capital requirements, described above. As of January 1, 2019, the "capital conservation buffer" increased
from 1.875% to 2.5%.
Contractual Obligations
The following table summarizes our contractual obligations to make future payments as of December 31, 2019. Payments
for borrowings do not include interest. Payments related to leases are based on actual payments specified in the underlying contracts.
Contractual Obligations:
Payments Due by Period
Total
Less Than
1 Year
1–3
Years
4–5
Years
After
5 Years
(in thousands)
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 150,000
25,500
Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease agreements. . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits with stated maturity dates . . . . . . . . . . . . . .
627,141
Total contractual obligations. . . . . . . . . . . . . . . . . . . . . . $ 827,387
24,746
$ 150,000
$
— $
— $
—
—
1,901
—
2,961
430,361
196,448
—
1,943
332
25,500
17,941
—
$ 582,262
$ 199,409
$
2,275
$
43,441
Off-Balance Sheet Arrangements
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 $189.7 million and $266.3 million, respectively at December 31, 2019 and 2018. 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. In addition, borrowers may be required to meet certain performance requirements to continue to draw
on these commitments. 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.
55
As of December 31, 2019
Amount of Commitment Expiration per Period
Total
Less Than
1 Year
1–3
Years
4–5
Years
After
5 Years
(in thousands)
Other Commitments:
Loan commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 102,986
80,472
Undisbursed construction loans. . . . . . . . . . . . . . . . . . . . . .
6,284
Unused home equity lines of credit . . . . . . . . . . . . . . . . . . .
Total other commitments . . . . . . . . . . . . . . . . . . . . . . . . $ 189,742
$
$
56,483
1,715
368
58,566
$
$
12,628
26,281
200
39,109
$
$
15,166
15,340
10
30,516
$
$
18,709
37,136
5,706
61,551
As of December 31, 2018
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 190,661
Undisbursed construction loans. . . . . . . . . . . . . . . . . . . . . .
68,151
Unused home equity lines of credit . . . . . . . . . . . . . . . . . . .
7,445
Total other commitments . . . . . . . . . . . . . . . . . . . . . . . . $ 266,257
$ 100,119
$
37,167
$
23,731
$
29,644
6,906
519
17,652
578
23,328
210
20,265
6,138
$ 107,544
$
55,397
$
47,269
$
56,047
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
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 model 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 the Company. Because both baseline 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. The simulation analyses are updated quarterly.
We use a net interest income at risk simulation to measure the sensitivity of net interest income to changes in market rates.
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) prepayment projections for loans and securities that are projected under each interest rate
scenario using internal and external mortgage analytics; (ii) new business loan rates that are based on recent new business origination
experience; and (iii) deposit pricing assumptions for non-maturity deposits reflecting the Bank’s limited history, management
judgment and core deposit studies. 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 Parallel Ramp Scenarios, 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 interest income at risk for the subsequent one-year period should not
56
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. Per
Company policy, the Bank should not be outside these limits for twelve consecutive months unless the Bank's forecasted capital
ratios are considered to be "well capitalized". As of December 31, 2019, the Bank has met all minimum regulatory capital
requirements to be considered "well capitalized".
The following tables set forth the estimated percentage change in our net interest income at risk over one-year simulation
periods beginning December 31, 2019 and 2018:
Parallel Ramp
Rate Changes (basis points)
(100) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
200. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Parallel Shock
Rate Changes (basis points)
(100) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
200. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
300. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated Percent Change
in Net Interest Income
At December 31,
2019
2018
3.00%
(6.80)
3.50%
(8.20)
Estimated Percent Change
in Net Interest Income
At December 31,
2019
2018
5.00%
(6.20)
(12.90)
(19.50)
5.20%
(7.30)
(15.20)
(22.70)
The net interest income at risk simulation results indicate that, as of December 31, 2019, we remain liability sensitive. The
liability sensitivity is due to the fact that there are more liabilities than assets subject to repricing as market rates change.
We conduct an 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 one of the income simulations. 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. 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.
Internal policy for economic value of equity at risk simulations should not decline more than 10% for a 100 basis point shift; 20%
for a 200 basis point shift; and 30% for a 300 basis point shift. Per Company policy, the Bank should not be outside these limits
unless the Banks forecasted capital ratios are considered to be "well capitalized".
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57
Estimated Percent Change
in Economic Value of Equity
At December 31,
2019
2018
(2.00)%
(6.50)
(17.20)
(25.50)
2.50%
(7.80)
(18.60)
(27.40)
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. As market interest rates initially rose
in the first half of 2019 and declined in the second half of 2019, the banking industry experienced fluctuating pricing on core
deposits. ALCO recognizes that deposit balances generally shift into higher yielding alternatives as market rates change. ALCO
has modeled changing costs of deposits in the 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 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. 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.
The Alternative Reference Rates Committee ("ARRC") has proposed that the Secured Overnight Funding Rate ("SOFR")
replace USD-LIBOR. ARRC has proposed that the transition to SOFR from USD-LIBOR will take place by the end of 2021. The
Company has limited material contracts that are indexed to USD-LIBOR. Industry organizations are currently working on the
transition plan but there is no definitive information regarding the future utilization of LIBOR or of any particular replacement
rate. The Company is currently monitoring this activity and evaluating the risks involved.
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 fluctuate accordingly. Unlike the assets and liabilities of 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.
58
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 — As of December 31, 2019 and 2018 and each of the three years in
the period ended December 31, 2019
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
59
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Bankwell Financial Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Bankwell Financial Group, Inc. and its subsidiaries (the
Company) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, shareholders’
equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes to the consolidated
financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally
accepted in the United States of America.
in accordance with
the Public Company Accounting Oversight Board
We have also audited,
(United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria
established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission in 2013, and our report dated February 28, 2020 expressed an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
the standards of
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ RSM US LLP
We have served as the Company’s auditor since 2017.
New Haven, Connecticut
February 28, 2020
60
Bankwell Financial Group, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
December 31,
2019
2018
ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78,051
$
—
78,051
Investment securities
Marketable equity securities, at fair value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available for sale investment securities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Held to maturity investment securities, at amortized cost (fair values of $18,307 and
$21,988 at December 31, 2019 and 2018, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,118
82,439
16,308
100,865
75,411
2,701
78,112
2,009
93,154
21,421
116,584
Loans receivable (net of allowance for loan losses of $13,509 and $15,462 at
December 31, 2019 and 2018, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,588,840
1,586,775
5,959
7,475
28,522
41,683
2,589
214
5,788
22,196
6,375
8,110
19,771
40,675
2,589
290
4,347
10,037
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,882,182
$
1,873,665
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits
Noninterest bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
191,518
$
173,198
1,300,385
1,491,903
1,329,046
1,502,244
Advances from the Federal Home Loan Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated debentures ($25,500 face, less unamortized debt issuance costs of $293 and
$345 at December 31, 2019 and 2018, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
150,000
160,000
25,207
32,675
25,155
12,070
1,699,785
1,699,469
Commitments and contingencies (Note 12)
Shareholders’ equity
Common stock, no par value; 10,000,000 shares authorized, 7,868,803 and 7,842,271
shares issued and outstanding at December 31, 2019 and 2018, respectively . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
120,589
69,324
(7,516)
182,397
120,527
54,706
(1,037)
174,196
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,882,182
$
1,873,665
See Notes to Consolidated Financial Statements
61
Bankwell Financial Group, Inc.
Consolidated Statements of Income
(In thousands, except share data)
Year Ended December 31,
2019
2018
2017
Interest and dividend income
Interest and fees on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest and dividends on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense
Interest expense on deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service charges and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sale of available for sale securities . . . . . . . . . . . . . . . . . . . . . . .
Loss on sale of other real estate owned, net . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings Per Common Share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted Average Common Shares Outstanding:
77,339
3,750
1,859
82,948
24,698
4,489
29,187
53,761
437
53,324
1,791
1,023
1,008
76
(102)
1,448
5,244
19,434
7,594
2,067
1,857
971
863
75
74
2,691
35,626
22,942
4,726
18,216
2.32
2.31
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
7,757,355
7,784,631
0.52
See Notes to Consolidated Financial Statements
$
$
$
$
$
74,715
3,921
1,428
80,064
18,951
4,787
23,738
56,326
3,440
52,886
984
1,090
1,057
222
—
547
3,900
18,973
6,790
2,033
2,103
1,587
1,044
92
779
2,232
35,633
21,153
3,720
17,433
2.23
2.21
7,722,175
7,775,480
0.48
$
$
$
$
$
66,841
3,570
790
71,201
12,694
4,143
16,837
54,364
1,341
53,023
1,427
1,007
1,170
165
(78)
938
4,629
16,284
6,165
1,866
2,072
1,193
912
118
1,116
2,797
32,523
25,129
11,299
13,830
1.80
1.78
7,572,409
7,670,413
0.28
62
Bankwell Financial Group, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive (loss) income:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) on available for sale securities. . . . . .
Reclassification adjustment for gains realized in net income . . . . . . . . .
Net change in unrealized gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax (expense) benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains (losses) on securities, net of tax . . . . . . . . . . . . . . .
Unrealized (losses) gains on interest rate swaps:
Unrealized (losses) gains on interest rate swaps . . . . . . . . . . . . . . . . . . .
Income tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized (losses) gains on interest rate swaps, net of tax . . . . . . . .
Total other comprehensive (loss) income, net of tax . . . . . . . . . . . . . . . . . .
Comprehensive income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended December 31,
2019
2018
2017
18,216
$
17,433
$
13,830
2,997
(76)
2,921
(614)
2,307
(11,121)
2,335
(8,786)
(6,479)
11,737
$
(1,632)
(222)
(1,854)
390
(1,464)
(1,604)
337
(1,267)
(2,731)
14,702
(357)
(165)
(522)
182
(340)
1,297
(454)
843
503
$
14,333
See Notes to Consolidated Financial Statements
63
Bankwell Financial Group, Inc.
Consolidated Statements of Shareholders’ Equity
(In thousands, except share data)
Balance at January 1, 2017 . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income, net of tax . . .
Cash dividends declared ($0.28 per share) .
Stock-based compensation expense. . . . . . .
Warrants exercised. . . . . . . . . . . . . . . . . . . .
Issuance of restricted stock . . . . . . . . . . . . .
Forfeitures of restricted stock . . . . . . . . . . .
Stock options exercised . . . . . . . . . . . . . . . .
Reclass adjustment resulting from tax law
change . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2017 . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss, net of tax. . . . . .
Cash dividends declared ($0.48 per share) .
Stock-based compensation expense. . . . . . .
Warrants exercised. . . . . . . . . . . . . . . . . . . .
Issuance of restricted stock . . . . . . . . . . . . .
Forfeitures of restricted stock . . . . . . . . . . .
Stock options exercised . . . . . . . . . . . . . . . .
Balance at December 31, 2018 . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss, net of tax. . . . . .
Cash dividends declared ($0.52 per share) .
Stock-based compensation expense. . . . . . .
Issuance of restricted stock . . . . . . . . . . . . .
Forfeitures of restricted stock . . . . . . . . . . .
Stock options exercised . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . .
ASU 2016-02 transition adjustment, net of
tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2019 . . . . . . . . . .
$
Number of
Outstanding
Shares
7,620,663
—
—
—
—
35,000
40,250
(18,227)
73,738
—
7,751,424
—
—
—
—
22,400
44,300
(3,873)
28,020
7,842,271
—
—
—
—
64,150
(5,800)
2,350
(34,168)
Common
Stock
Retained
Earnings
$
115,353
—
—
—
917
663
—
—
1,368
—
118,301
—
—
—
1,290
400
—
—
536
120,527
—
—
—
1,020
—
—
30
(988)
29,652
13,830
—
(2,149)
—
—
—
—
—
(301)
41,032
17,433
—
(3,759)
—
—
—
—
—
54,706
18,216
—
(4,079)
—
—
—
—
—
$
Accumulated
Other
Comprehensive
Income (Loss)
890
$
—
503
—
—
—
—
—
—
301
1,694
—
(2,731)
—
—
—
—
—
—
(1,037)
—
(6,479)
—
—
—
—
—
—
Total
145,895
13,830
503
(2,149)
917
663
—
—
1,368
—
161,027
17,433
(2,731)
(3,759)
1,290
400
—
—
536
174,196
18,216
(6,479)
(4,079)
1,020
—
—
30
(988)
—
7,868,803
$
—
120,589
$
481
69,324
$
—
(7,516) $
481
182,397
See Notes to Consolidated Financial Statements
64
Bankwell Financial Group, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
18,216
$
17,433
$
13,830
Adjustments to reconcile net income to net cash provided by operating activities: . . . . . . . .
Year Ended December 31,
2019
2018
2017
Net accretion of premiums and discounts on investment securities . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sales of available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of marketable equity securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in cash surrender value of bank-owned life insurance . . . . . . . . . . . . . . . . . . . .
Loan principal sold from loans originated for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of loans originated for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains and fees from sales of loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (accretion) amortization of purchase accounting adjustments . . . . . . . . . . . . . . . . . .
Loss on sale of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on sale and write-downs of other real estate owned, net. . . . . . . . . . . . . . . . . . . . . .
Net change in: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(368)
437
276
(76)
(66)
3,377
52
(1,008)
—
—
(1,791)
1,020
(76)
10
102
(360)
416
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(12,731)
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 . . . . . . . . . . . . . . . . . . . . .
Net proceeds from sales and calls of held to maturity securities . . . . . . . . . . . . . . . . . . . . . .
(799)
6,631
9,881
226
16,455
4,900
Purchases of available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(12,270)
Purchases of marketable equity securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of held to maturity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of bank-owned life insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan principal sold from loans not originated for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of loans not originated for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reduction (purchase) of Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities
Net change in time certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in other deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(43)
—
—
(3,359)
(25,510)
27,301
(645)
635
1,115
18,686
12,419
(22,760)
(10,000)
—
65
(54)
3,440
1,284
(222)
—
1,732
52
(1,057)
—
—
(984)
1,290
239
44
—
(745)
(465)
(1,008)
(1,002)
19,977
9,430
180
12,377
—
(24,379)
(2,003)
—
—
(31)
1,341
3,908
(165)
—
1,513
52
(1,170)
(3,485)
4,626
(1,427)
917
(80)
—
128
(829)
(952)
(1,740)
4,136
20,572
5,217
212
54,705
5,690
(64,700)
—
(10,609)
(5,000)
(68,923)
(177,549)
(8,980)
9,964
(3,351)
1,073
—
(14,264)
14,805
(1,874)
(1,239)
144
(74,612)
(194,462)
(16,541)
120,380
(39,000)
400
29,417
79,967
39,000
663
Proceeds from exercise of options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30
(4,079)
(988)
Net cash (used in) provided by financing activities. . . . . . . . . . . . . . . . . . . . . . . .
(25,378)
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . .
(61)
536
(3,759)
—
62,016
7,381
Cash and cash equivalents:
Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78,112
70,731
End of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
78,051
$
78,112
$
Supplemental disclosures of cash flows information:
Cash paid for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
23,937
$
18,662
$
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,893
3,685
Noncash investing and financing activities
Loans transferred to other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in unrealized losses or gains on available-for-sale securities . . . . . . . . . . . . .
Net change in unrealized losses or gains on interest rate swaps . . . . . . . . . . . . . . . . . . . .
Establishment of right-of-use-asset and lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . .
ASU 2016-02 transition adjustment, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,217
2,921
(11,121)
11,493
481
—
(1,854)
(1,604)
—
—
1,368
(2,149)
—
148,266
(25,624)
96,355
70,731
16,582
8,020
—
(522)
1,297
—
—
See Notes to Consolidated Financial Statements
66
1. Nature of Operations and Summary of Significant Accounting Policies
Bankwell Financial Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bankwell Financial Group, Inc. 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 (“Wilton”), which added one branch and approximately $25.1 million in
loans and $64.2 million in deposits. In October 2014, the Bank acquired Quinnipiac Bank and Trust Company (“Quinnipiac”)
which added two branches and approximately $97.8 million in loans and $100.6 million in deposits.
The Bank is a Connecticut state chartered commercial bank, founded in 2002, whose deposits are insured under the Deposit
Insurance Fund administered by the Federal Deposit Insurance Corporation (“FDIC”). The Bank provides a full range of banking
services to commercial and consumer customers, primarily concentrated in the New York metropolitan area and throughout
Connecticut, with the majority of our loans in Fairfield and New Haven Counties, Connecticut, with branch locations in New
Canaan, Stamford, Fairfield, Wilton, Norwalk, Hamden, Westport, Darien and North Haven Connecticut.
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.
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, and disclosures
of contingent assets and liabilities as of the date of the consolidated balance sheet and revenue and expenses for the period. Actual
results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term
relate to the allowance for loan losses, derivative instrument valuation, investment securities valuation, evaluation of investment
securities for other than temporary impairment and deferred income taxes 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 Company as one segment or unit.
Basis of consolidated financial statement presentation
The consolidated financial statements have been prepared in accordance with GAAP and general practices within the banking
industry. Such policies have been followed on a consistent basis.
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 investments
are categorized as marketable equity, available for sale or held to maturity securities. 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. Marketable
equity securities are carried at fair value, with any changes in fair value reported in earnings.
67
Investment securities in the available for sale and held-to-maturity portfolios are reviewed quarterly for other-than-temporary
impairment ("OTTI"). If the fair value of a debt security is below amortized cost, 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. OTTI is required
to be recognized regardless of the credit loss component if the Company intends to sell the security or if it is “more-likely-than-
not” that the Company will be required to sell the security before recovery of its amortized cost basis. 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 and the level of credit enhancement
provided by the structure.
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.
Transfers of debt securities into the held to maturity classification from the available for sale classification are made at fair
value on the date of transfer. The unrealized holding gain or loss on the date of transfer is retained in accumulated other
comprehensive income and in the carrying value of the held to maturity securities. Such amounts are amortized over the remaining
contractual lives of the securities. When transfers of debt securities into the available for sale classification from the held to maturity
classification occur, any unrealized holding gains or losses on the transfer date are recognized in other comprehensive income.
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 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. There are no
quoted market prices for this security and the security is not liquid. The Company can sell these securities back to the FHLB at
par.
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 trade 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 records a servicing asset
for 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.
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, put presumptively beyond
the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the transferor
does not maintain effective control over the transferred assets through either (a) an agreement that both entitles and obligates the
transferor to repurchase or redeem the assets before maturity or (b) the ability to unilaterally cause the holder to return specific
assets, other than through a cleanup call.
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, charge-offs, recoveries, net deferred loan
origination fees and unamortized loan premiums.
68
Past due or delinquency status for all loans is based on the number of days past due in accordance with its contractual payment
terms.
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.
Impaired loans also include loans modified in troubled debt restructurings where concessions have been granted to borrowers
experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions,
forgiveness of principal, forbearance or other actions intended to maximize collection.
Loans greater than 90 days past due are put on nonaccrual status (excluding certain acquired credit impaired loans). 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 payments are recognized on
a cash basis or principal recapture basis depending on a number of factors including probability of collection and if impairment
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.
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 may
not 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 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. 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. 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 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 acquired 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.
69
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 (ALLL)
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, 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, including appropriate peer
data, adjusted for qualitative factors.
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.
Reserve for Unfunded Commitments
The reserve for unfunded commitments provides for probable losses inherent with funding the unused portion of legal
commitments to lend. The unfunded reserve calculation includes factors that are consistent with the ALLL methodology for our
loan portfolio as well as a draw down factor applied to the various commitments. The reserve for unfunded commitments is
included within other liabilities in the accompanying Consolidated Balance Sheets, and changes in the reserve are reported as a
component of other expense in the accompanying Consolidated Statements of Income. See Note 12: Commitments and
Contingencies for further information.
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.
Goodwill and Intangibles
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination.
Intangible assets are assets acquired in a business combination that lack physical substance but can be distinguished from goodwill
because the intangible asset is capable of being sold or exchanged on its own or in combination with related contracts, assets or
liabilities. Intangible assets are amortized on a straight-line or accelerated basis over estimated lives. Goodwill is not amortized.
Goodwill and identifiable intangible assets are evaluated for impairment annually or whenever events or changes in circumstances
70
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.
Other Real Estate Owned
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 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 three to thirty-nine years. Gains and losses on dispositions are recognized upon realization. Maintenance
and repairs are expensed as incurred and improvements are capitalized.
Leases
The Company recognizes and measures it leases in accordance with ASC 842, "Leases". The Company leases real estate for
its branch offices under various operating lease agreements. In addition, the Company's headquarter building is on land leased
from the local municipality. The Company determines if an arrangement is a lease, or contains a lease, at inception of a contract
and when the terms of an existing contract are changed. The Company recognizes a lease liability and right-of-use-asset (ROUA)
at the commencement date of the lease. The lease liability is initially and subsequently recognized based on the present value of
its future lease payments. The discount rate is the implicit rate if it's readily determinable or otherwise the Company uses its
incremental borrowing rate. The implicit rates of our leases are not readily determinable and accordingly, we use our incremental
borrowing rate based on the information available at the commencement date for all leases. The ROUA is subsequently measured
throughout the lease term at the amount of the remeasured lease liability (i.e., present value of the remaining lease payments),
plus any unamortized initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of any
lease incentives received, and any impairment recognized. Lease cost for lease payments is recognized on a straight-line basis
over the lease term. The ROUA is included in premises and equipment, net and the lease liability is included in accrued expenses
and other liabilities on the consolidated balance sheets.
Impairment of Long-Lived Assets
Long-lived assets, including premises and equipment, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment is indicated by that review, the
asset is written down to its estimated fair value through a charge to noninterest expense.
Servicing Rights
When loans are sold on a servicing retained basis, servicing rights are initially recorded at fair value with the income statement
effect recorded in noninterest income. All classes of servicing assets are subsequently measured using the amortization method,
which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the life of the
underlying loans.
Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount.
Any impairment is reported as a valuation allowance, to the extent that fair value is less than the carrying amount. If the Company
later determines that all or a portion of the impairment no longer exists, a reduction of the allowance may be recorded as an increase
to income. Changes in the valuation allowance are reported with service charges and fees income on the consolidated statements
of income. The fair values of servicing rights are subject to fluctuations as a result of changes in estimated and actual prepayment
speeds and default rates and losses.
Loans serviced for others are not included in the accompanying consolidated balance sheets.
Servicing fee income, which is included in service charges and fees on the income statement, is recorded for fees earned for
servicing loans. Fees earned for servicing loans are based on a contractual percentage of the outstanding principal amount of the
loan and are recorded as income when earned. The amortization of servicing rights is recorded in noninterest income.
71
Income Taxes
The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes
the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-
likely-than-not that all or some portion of the deferred tax assets will not be realized.
In the ordinary course of business there is inherent uncertainty in quantifying the Company’s income tax positions. Income
tax positions and recorded tax benefits assessed for all years are subject to examination based upon management’s evaluation of
the facts, circumstances, and information available at the reporting date. For those tax positions where it is more-likely-than-not
that a tax benefit will be sustained, we have determined the amount of the tax benefit to be recognized by estimating the largest
amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority
that has full knowledge of all relevant information. The portion of the benefits associated with tax positions taken that exceeds
the amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest
and penalties that would be payable to the taxing authorities upon examination. The Company has $269 thousand and $193 thousand
of liabilities for uncertain tax positions at December 31, 2019 and 2018, respectively. Where applicable, associated interest and
penalties have also been recognized. We recognize accrued interest and penalties related to unrecognized tax benefits as a component
of income tax expense.
Advertising costs
Advertising costs are expensed as incurred.
Stock Compensation
The Company measures and recognizes compensation cost relating to share-based payment transactions based on the grant-
date fair value of the equity instruments issued. The fair value of time-based restricted stock is recorded based on the grant date
fair value of the Company’s common stock. For performance based grants, the Company records an expense over the vesting
period based on (a) the probability that the performance metric will be met and (b) the fair market value of the Company’s stock
at the date of the grant. The fair value of stock options is determined using the Black-Scholes Option Pricing model. Stock-based
compensation costs are recognized over the requisite service period for the awards. Compensation expense reflects the number
of awards expected to vest and is adjusted based on awards that ultimately vest. The Company recognizes forfeitures as they occur.
Earnings Per Share
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.
Comprehensive Income
Comprehensive income represents the sum of net income and items of other comprehensive income or loss, including net
unrealized gains or losses on securities available for sale and net unrealized gains or losses on derivatives accounted for as cash
flow hedges. The Company’s total comprehensive income or loss for the years ended December 31, 2019, 2018 and 2017 is
reported in the Consolidated Statements of Comprehensive Income.
Fair Values of Financial Instruments
The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value
disclosures. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However,
in certain instances, there are no quoted market prices for certain assets or liabilities. 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 rate and estimates of future cash flows. Accordingly, the fair value
estimates may not be realized in an immediate settlement of the asset or liability.
72
Fair value measurements focus on exit prices in an orderly transaction (that is, not a forced liquidation or distressed sale)
between market participants at the measurement date under current market conditions. If there has been a significant decrease in
the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques
may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement
date under current market conditions depends on the facts and circumstances and requires the use of significant judgment.
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are
inherent weaknesses in any estimation technique. Therefore, 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 at either
December 31, 2019 or December 31, 2018. 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.
Derivative Instruments
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 interest rate swap assets are presented in other assets and the interest rate swap liabilities are presented in accrued expenses
and other liabilities in the consolidated balance sheets. The hedge strategy converts the rate of interest on short-term rolling FHLB
advances or Brokered CDs to long-term fixed interest rates, thereby protecting the Bank from interest rate variability. The Company
does not offset derivative assets and derivative liabilities for financial statement presentation purposes.
The Company also has derivatives not designated as hedges. Derivatives not designated as hedges are not speculative and
result from a service the Company provides to certain loan customers. The Company executes interest rate swaps with commercial
banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged
by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure
resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting
requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in
earnings.
Related Party Transactions
Directors and officers of the Company and their affiliates have been customers of and have had transactions with the Company,
and it is expected that such persons will continue to have such transactions in the future. Management believes that all deposit
accounts, loans, services and commitments comprising such transactions were made in the ordinary course of business, on
substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions
with other customers who are not directors or officers. In the opinion of management, the transactions with related parties did not
involve more than normal risks of collectability, nor favored treatment or terms, nor present other unfavorable features. Note 22
contains details regarding related party transactions.
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 2019 financial statement presentation. These
reclassifications only changed the reporting categories and did not affect the results of operations or consolidated financial position.
Recent accounting pronouncements
The following section includes changes in accounting principles and potential effects of new accounting guidance and
pronouncements.
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,
73
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.
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. ASU 2018-13 will be effective for public
business entities for fiscal years beginning after December 15, 2019, including interim periods in the year of adoption. Early
adoption is permitted for any interim or annual period. The Company does not expect the application of this guidance to have a
material impact on the Company’s financial statements.
Recently adopted accounting pronouncements
ASU No. 2016-02, Leases (Topic 842): The amendments in this ASU require lessees to recognize, on the balance sheet, assets
and liabilities for the rights and obligations created by leases. Accounting by lessors will remain largely unchanged. In July 2018,
the FASB issued a subsequent update which introduced a new transition method, under which an entity initially applies the new
leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in
the period of adoption. The guidance was effective for the Company on January 1, 2019. The Company recognized $0.5 million
as a cumulative-effect adjustment to the opening balance of retained earnings at the time of adoption on January 1, 2019. In
addition, the Company recorded a right-of-use-asset totaling $10.6 million and a lease liability totaling $10.6 million on the balance
sheet for the Company's outstanding lease obligations on January 1, 2019. The right-of-use-asset is disclosed within premises and
equipment, net on the balance sheet and the lease liability is disclosed within accrued expenses and other liabilities on the balance
sheet. See Note 7 to our Consolidated Financial Statements for further information regarding leases.
ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606): This ASU clarifies the principles for recognizing
revenue. The guidance notes that an entity should apply the following steps when recognizing revenue: (i) identify the contract(s)
with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the
transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a
performance obligation. In 2016, the FASB issued further implementation guidance regarding revenue recognition. This additional
guidance included clarification on certain principal versus agent considerations within the implementation of the guidance as well
as clarification related to identifying performance obligations and licensing. The guidance also requires new qualitative and
quantitative disclosures, including disaggregation of revenues and descriptions of performance obligations. The guidance along
74
with its updates is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The
Company adopted the guidance on January 1, 2018 using the modified retrospective method.
In evaluating this standard, management has determined that the majority of revenue earned by the Company is from revenue
streams not included in the scope of this standard and for in-scope revenue streams management determined that a cumulative
effect adjustment to opening retained earnings as a result of adopting this standard is not needed.
The Company recognizes revenue from contracts with customers when it satisfies its performance obligations. The Company’s
performance obligations are generally satisfied as services are rendered and can either be satisfied at a point in time or over time.
Unsatisfied performance obligations at the report date are not material to our consolidated financial statements.
For the revenue that is within scope of Topic 606, the following is a description of principal activities from which the Company
generates its revenue from contracts with customers.
Revenues for the Company in scope under Topic 606 include service charges and fees and gains or losses on the sale of
foreclosed real estate. Service charges and fees include revenue that is recognized at a point in time, including ATM fees, wire
transfer fees, overdraft charge fees, and stop-payment and returned check fees. Such revenue is derived from transactional
information and is recognized as revenue immediately as the transactions occur or upon providing the service to complete the
customer’s transaction. In addition, service charges and fees include fee income earned on customer deposit accounts, that is
recognized over a period of time, generally monthly, as services are performed and performance obligations are satisfied. Generally,
these services are cancellable with little to no notice needed. The revenue generated from service charges and fees totaled $1.0
million and $1.1 million for years ended December 31, 2019 and 2018, respectively. The loss recognized from the sale of other
real estate owned was $0.1 million for the year ended December 31, 2019. There was no income recognized from the gain or loss
of foreclosed real estate for the year ended December 31, 2018.
2. Shareholders’ Equity
Common Stock
The Company has 10,000,000 shares authorized and 7,868,803 shares issued and outstanding at December 31, 2019 and
10,000,000 shares authorized and 7,842,271 shares issued and outstanding at December 31, 2018. The Company's stock is traded
on the NASDAQ stock market under the ticker symbol BWFG.
Warrants
On October 1, 2014, the Company acquired Quinnipiac Bank and Trust Co. and, in connection therewith, 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 $17.86. During the first
quarter of 2018, all remaining warrants were exercised. The Company does not have any warrants outstanding as of December 31,
2019.
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 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. The Company did not repurchase any of its common stock for
the year ended December 31, 2018.
3. Goodwill and other intangible assets
Information on goodwill for the years ended December 31, 2019, 2018 and 2017 is as follows:
75
Year Ended
December 31, 2019
Year Ended
December 31, 2018
Year Ended
December 31, 2017
(In thousands)
Balance, beginning of the period . . . . . . . . . . . . . . . . . . . . . $
Impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, end of the period . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,589
—
2,589
$
$
2,589
—
2,589
$
$
2,589
—
2,589
The Company tests for goodwill impairment annually as of June 30th. No impairment was required to be recorded on goodwill
for 2019, 2018 or 2017.
The table below provides information regarding the carrying amounts and accumulated amortization of amortized intangible
assets as of the dates set forth below. The remaining net intangible asset as of December 31, 2019 will be amortized over a period
of approximately 3 years.
December 31, 2019
Core deposit intangible. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31, 2018
Core deposit intangible. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,029
1,029
$
$
815
739
$
$
214
290
Gross Intangible
Asset
Accumulated
Amortization
Net Intangible
Asset
(In thousands)
76
4.
Investment Securities
The amortized cost, gross unrealized gains and losses and fair values of available for sale and held to maturity securities
segregated by contractual maturity at December 31, 2019 were as follows:
Amortized
Cost
December 31, 2019
Gross Unrealized
Gains
Losses
Fair Value
(In thousands)
Available for sale securities:
U.S. Government and agency obligations
Less than one year. . . . . . . . . . . . . . . . . . . . . . . . . . . $
Due from one through five years . . . . . . . . . . . . . . .
Due from five through ten years . . . . . . . . . . . . . . . .
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . .
2,100
$
— $
9,950
8,311
60,902
81
218
879
Total available for sale securities . . . . . . . . . . . . . $
81,263
$
1,178
$
(1) $
—
(1)
—
(2) $
2,099
10,031
8,528
61,781
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
Total held to maturity securities . . . . . . . . . . . . . . $
16,308
$
1,999
$
—
— $
85
18,307
77
The amortized cost, gross unrealized gains and losses and fair values of available for sale and held to maturity securities
segregated by contractual maturity at December 31, 2018 were as follows:
Available for sale securities:
U.S. Government and agency obligations
Less than one year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Due from one through five years . . . . . . . . . . . . . . . . . . . . . . .
Due from five through ten years . . . . . . . . . . . . . . . . . . . . . . . .
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State agency and municipal obligations
Due from one through five years . . . . . . . . . . . . . . . . . . . . . . .
Due from five through ten years . . . . . . . . . . . . . . . . . . . . . . . .
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized
Cost
December 31, 2018
Gross Unrealized
Gains
Losses
Fair Value
(In thousands)
1,000
$
— $
12,025
100
70,690
83,815
2,234
1,261
528
4,023
—
—
7
7
18
18
—
36
(11) $
(161)
(5)
(1,509)
(1,686)
—
—
(52)
(52)
989
11,864
95
69,188
82,136
2,252
1,279
476
4,007
Corporate bonds
Due from one through five years . . . . . . . . . . . . . . . . . . . . . . .
7,061
Total available for sale securities . . . . . . . . . . . . . . . . . . . . . $
94,899
$
—
43
$
(50)
(1,788) $
7,011
93,154
Held to maturity securities:
State agency and municipal obligations
Less than one year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds
Due from one through five years . . . . . . . . . . . . . . . . . . . . . . .
1,000
Government-sponsored mortgage backed securities
No contractual maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
93
3,894
$
6
$
— $
16,434
20,328
669
675
—
5
(113)
(113)
3,900
16,990
20,890
—
1,000
—
(113) $
98
21,988
Total held to maturity securities . . . . . . . . . . . . . . . . . . . . . . $
21,421
$
680
$
The gross realized gains on the sales of investment securities totaled $0.1 million for the year ended December 31, 2019. The
gross realized losses on the sales of investment securities totaled $17.0 thousand for the year ended December 31, 2019. Total
sales proceeds and calls of available for sale securities were $16.5 million for the year ended December 31, 2019. The gross
realized gains on the sales of investment securities totaled $0.2 million for the year ended December 31, 2018. The gross realized
losses on the sales of investment securities totaled $2.0 thousand for the year ended December 31, 2018. Total sales proceeds and
calls of available for sale securities were $12.4 million for the year ended December 31, 2018.
At December 31, 2019 and December 31, 2018, none of the Company's securities were pledged as collateral with the Federal
Home Loan Bank ("FHLB") or any other institution.
As of December 31, 2019, the actual duration of the Company's available for sale securities were significantly shorter than
the notional maturities.
78
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. At December 31, 2018, the Company held marketable equity securities with a fair value and amortized cost
of $2.0 million. These securities represent an investment in mutual funds that have a primary objective to make investments for
CRA purposes.
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
and 2018:
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
(Dollars in thousands)
Fair
Value
Unrealized
Loss
Percent
Decline
from
Amortized
Cost
December 31, 2019
U.S. Government
and agency
obligations . . . . . . . . $
Total investment
securities . . . . . . . . $
December 31, 2018
U.S. Government
and agency
obligations . . . . . . . . $
State agency and
municipal
obligations . . . . . . . .
Corporate bonds . . . .
Total investment
securities . . . . . . . . $
99
99
$
$
(1)
(1)
1.01% $
1.01% $
998
998
$
$
(1)
(1)
0.13% $
1,097
0.13% $
1,097
$
$
(2)
(2)
0.21%
0.21%
4,990
$
(38)
0.75% $
72,676
$
(1,648)
2.22% $
77,666
$
(1,686)
2.12%
8,212
2,033
(113)
(11)
1.36%
0.51%
476
4,978
(52)
(39)
9.87%
0.78%
8,688
7,011
(165)
(50)
1.87%
0.70%
15,235
$
(162)
1.05% $
78,130
$
(1,739)
2.18% $
93,365
$
(1,901)
2.00%
There were two and twenty-five individual investment securities as of December 31, 2019 and December 31, 2018,
respectively, in which the fair value of the security was less than the amortized cost of the security.
The U.S. Government and agency obligations owned are either direct obligations of the U.S. Government or guaranteed by
the U.S. Government, therefore the contractual cash flows are guaranteed and as a result the securities in this portfolio are not
considered other than temporarily impaired.
At December 31, 2019, the Company has the intent and ability to retain its investment securities in an unrealized loss position
until the decline in value has recovered or the security has matured.
79
5. Loans Receivable and Allowance for Loan Losses
The following table sets forth a summary of the loan portfolio at December 31, 2019 and 2018:
December 31, 2019
December 31, 2018
Real estate loans:
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan origination fees, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized loan premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In thousands)
147,109
$
1,128,614
98,583
1,374,306
230,028
150
1,604,484
(13,509)
(2,137)
2
Loans receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,588,840
$
178,079
1,094,066
73,191
1,345,336
258,978
412
1,604,726
(15,462)
(2,497)
8
1,586,775
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 no longer originate residential mortgage loans. As of the
beginning of the third quarter of 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 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 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.
80
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.
Allowance for loan losses
During the fourth quarter of 2018, the Company recognized a charge-off totaling $6.2 million attributable to one lending
relationship, affecting the commercial real estate and commercial business segments.
The following tables set forth the activity in the Company’s allowance for loan losses for the years ended December 31, 2019,
2018 and 2017, by portfolio segment:
Residential
Real Estate
Commercial
Real Estate
Construction
Commercial
Business
Consumer
Total
(In thousands)
For the Year Ended December 31, 2019
Beginning balance . . . . . . . . . . $
Charge-offs. . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . .
Provisions (Credits) . . . . . . . .
Ending balance . . . . . . . . . . . . . $
857
$
11,562
$
140
$
(875)
—
748
730
(594)
—
(417)
$
10,551
$
—
—
184
324
$
2,902
(897)
19
(121)
1,903
Residential
Real Estate
Commercial
Real Estate
Construction
Commercial
Business
(In thousands)
$
$
$
1
(75)
32
43
1
$
15,462
(2,441)
51
437
$
13,509
Consumer
Total
1
(77)
7
70
1
$
$
18,904
(6,926)
44
3,440
15,462
For the Year Ended December 31, 2018
Beginning balance . . . . . . . . . . $
Charge-offs. . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . .
(Credits) provisions . . . . . . . .
Ending balance . . . . . . . . . . . . . $
3,498
(815)
19
200
$
2,902
$
1,721
$
12,777
$
907
$
(420)
—
(444)
(5,614)
18
4,381
857
$
11,562
$
—
—
(767)
140
81
Residential
Real Estate
Commercial
Real Estate
Construction
Commercial
Business
Consumer
Total
(In thousands)
For the Year Ended December 31, 2017
Beginning balance . . . . . . . . . . $
Charge-offs. . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . .
(Credits) provisions . . . . . . . .
Ending balance . . . . . . . . . . . . . $
1,802
$
9,415
$
2,105
$
—
146
(227)
—
—
3,362
1,721
$
12,777
$
—
—
(1,198)
907
$
4,283
(521)
4
(268)
3,498
$
$
377
(51)
3
(328)
1
$
$
17,982
(572)
153
1,341
18,904
Loans evaluated for impairment and the related allowance for loan losses as of December 31, 2019 and 2018 were as follows:
Portfolio
Allowance
(In thousands)
December 31, 2019
Loans individually evaluated for impairment:
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans collectively evaluated for impairment:
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,020
$
14,203
4,330
22,553
143,089
1,114,411
98,583
225,698
150
1,581,931
1,604,484
$
—
372
134
506
730
10,179
324
1,769
1
13,003
13,509
82
Portfolio
Allowance
(In thousands)
December 31, 2018
Loans individually evaluated for impairment:
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,534
$
6,383
6,155
3
19,075
Loans collectively evaluated for impairment:
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
171,545
1,087,683
73,191
252,823
409
1,585,651
1,604,726
$
233
—
133
—
366
624
11,562
140
2,769
1
15,096
15,462
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 the 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.
83
The following tables present credit risk ratings by loan segment as of December 31, 2019 and 2018:
December 31, 2019
December 31, 2018
Commercial Credit Quality Indicators
Commercial
Real Estate
Construction
Commercial
Business
Total
Commercial
Real Estate
Construction
Commercial
Business
Total
(In thousands)
Pass . . . . . . . . . . . . . . . . . $
1,104,164
$
98,583
$
208,932
$
1,411,679
$
1,084,695
$
73,191
$
237,933
$
1,395,819
Special mention. . . . . . . .
Substandard. . . . . . . . . . .
Doubtful . . . . . . . . . . . . .
Loss . . . . . . . . . . . . . . . . .
10,247
14,203
—
—
—
—
—
—
16,766
854
3,476
—
27,013
15,057
3,476
—
2,988
2,516
3,867
—
—
—
—
—
14,890
2,592
3,563
—
17,878
5,108
7,430
—
Total loans . . . . . . . . $
1,128,614
$
98,583
$
230,028
$
1,457,225
$
1,094,066
$
73,191
$
258,978
$
1,426,235
Residential and Consumer Credit Quality Indicators
December 31, 2019
December 31, 2018
Residential
Real Estate
Consumer
Total
Residential
Real Estate
Consumer
Total
(In thousands)
Pass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
143,089
$
150
$
143,239
$
171,415
$
409
$
171,824
Special mention . . . . . . . . . . . . . . . . . . . . .
Substandard . . . . . . . . . . . . . . . . . . . . . . . .
Doubtful . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
3,832
188
—
—
—
—
—
—
3,832
188
—
130
6,534
—
—
—
3
—
—
130
6,537
—
—
Total loans . . . . . . . . . . . . . . . . . . . . . . $
147,109
$
150
$
147,259
$
178,079
$
412
$
178,491
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.
84
The following tables set forth certain information with respect to the Company's loan portfolio delinquencies by portfolio
segment as of December 31, 2019 and December 31, 2018:
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 . . . . . . $
Commercial real estate. . . . . .
Construction. . . . . . . . . . . . . .
Commercial business . . . . . . . .
Consumer . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . $
— $
355
1,357
—
—
1,712
$
943
—
—
—
—
943
$
$
281
5,935
—
3,455
—
9,671
$
$
1,224
6,290
1,357
3,455
—
12,326
$
145,885
1,122,324
97,226
226,573
150
$ 1,592,158
$
147,109
1,128,614
98,583
230,028
150
$ 1,604,484
December 31, 2018
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 . . . . . . $
Commercial real estate. . . . . .
Construction. . . . . . . . . . . . . .
Commercial business . . . . . . . .
Consumer . . . . . . . . . . . . . . . . .
994
668
—
—
—
$
— $
2,203
$
3,197
$
174,882
$
178,079
133
—
1
—
4,386
—
4,076
—
5,187
—
4,077
—
1,088,879
1,094,066
73,191
254,901
412
73,191
258,978
412
Total loans . . . . . . . . . . . . . $
1,662
$
134
$
10,665
$
12,461
$ 1,592,265
$ 1,604,726
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 this particular loan is a result of an administrative delay as the loan had matured in 2019 as opposed to
delinquent payments. There were no loans delinquent greater than 90 days and still accruing interest as of December 31, 2018.
Loans on nonaccrual status
The following is a summary of nonaccrual loans by portfolio segment as of December 31, 2019 and 2018:
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2019
2018
(In thousands)
1,560
$
5,222
3,806
3,812
5,950
4,320
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
10,588
$
14,082
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 years ended December 31, 2019, 2018 and 2017 was $0.7 million, $1.1 million and $0.2 million,
respectively. The amount of actual interest income recognized on these loans was $44 thousand, $11 thousand and $0.1 million
for the years ended December 31, 2019, 2018 and 2017, respectively.
At December 31, 2019 and 2018, there were no commitments to lend additional funds to borrowers on nonaccrual status.
Nonaccrual loans with no specific reserve totaled $9.6 million and $11.5 million at December 31, 2019 and 2018, respectively.
85
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 loan that is estimated to be impaired.
The following tables summarize impaired loans by portfolio segment and the average carrying amount and interest income
recognized on impaired loans by portfolio segment as of December 31, 2019, 2018 and 2017:
As of and for the Year Ended December 31, 2019
Carrying
Amount
Unpaid
Principal
Balance
Associated
Allowance
(In thousands)
Average
Carrying
Amount
Interest
Income
Recognized
4,020
$
4,144
$
— $
4,094
$
Impaired loans without a valuation allowance:
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial real estate. . . . . . . . . . . . . . . . . . . . . . . . .
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 . . .
8,571
3,915
16,506
5,632
415
6,047
8,859
5,126
18,129
5,647
417
6,064
Total impaired loans . . . . . . . . . . . . . . . . . . . . . . . $
22,553
$
24,193
$
—
—
—
372
134
506
506
8,250
3,887
16,231
5,682
441
6,123
$
22,354
$
123
203
25
351
25
9
34
385
As of and for the Year Ended December 31, 2018
Carrying
Amount
Unpaid
Principal
Balance
Associated
Allowance
(In thousands)
Average
Carrying
Amount
Interest
Income
Recognized
Impaired loans without a valuation allowance:
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial real estate. . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total impaired loans without a valuation allowance .
Impaired loans with a valuation allowance:
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . .
Total impaired loans with a valuation allowance . . .
Total impaired loans . . . . . . . . . . . . . . . . . . . . . . . $
4,520
6,383
5,212
3
16,118
2,014
943
2,957
19,075
$
$
4,613
12,191
6,051
3
22,858
2,054
945
2,999
25,857
$
$
— $
—
—
—
—
233
133
366
366
$
4,906
11,713
4,945
4
21,568
2,049
684
2,733
24,301
$
$
106
20
297
—
423
—
25
25
448
86
As of and for the Year Ended December 31, 2017
Carrying
Amount
Unpaid
Principal
Balance
Associated
Allowance
(In thousands)
Average
Carrying
Amount
Interest
Income
Recognized
3,515
$
3,556
$
— $
3,530
$
Impaired loans without a valuation allowance:
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial real estate. . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . .
Total impaired loans without a valuation allowance .
Impaired loans with a valuation allowance:
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate. . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . .
Total impaired loans with a valuation allowance . . .
1,841
1,950
7,306
1,092
5,745
710
7,547
1,915
2,024
7,495
1,092
5,745
712
7,549
Total impaired loans . . . . . . . . . . . . . . . . . . . . . . . $
14,853
$
15,044
$
Troubled debt restructurings ("TDRs")
—
—
—
8
876
71
955
955
1,916
2,109
7,555
1,100
5,854
873
7,827
$
15,382
$
—
21
89
110
—
261
47
308
418
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 $9.6 million at December 31, 2019 and $7.2 million at December 31, 2018. The following
table provides information on loans that were modified as TDRs during the periods presented:
Number of Loans
Pre-Modification
Post-Modification
2019
2018
2017
2019
2018
2017
2019
2018
2017
Outstanding Recorded Investment
(Dollars in thousands)
Years ended December 31,
Commercial real estate . . .
Residential real estate . . . .
Commercial business . . . .
Total . . . . . . . . . . . . . . .
1
1
2
4
1
3
1
5
— $ 4,898
34
2
465
4
$ 5,397
6
$
37
3,394
608
$ 4,039
$ — $ 4,676
34
465
$ 5,175
2,957
371
$ 3,328
$
29
3,390
608
$ 4,027
$ —
2,957
741
$ 3,698
At December 31, 2019 and December 31, 2018, there were three nonaccrual loans identified as TDRs totaling $1.6 million
and six nonaccrual loans identified as TDRs totaling $3.6 million, respectively.
87
The following table provides information on how loans were modified as a TDR for the years ended December 31, 2019,
2018 and 2017.
December 31,
2019
2018
2017
Maturity Concession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Maturity and payment concession. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturity and rate concession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment concession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate and payment concession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In thousands)
125
$
— $
—
—
4,676
374
750
608
2,669
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5,175
$
4,027
$
638
1,925
1,032
103
—
3,698
Two loans previously modified as a TDR, in the amount of $1.3 million re-defaulted during the year ended December 31,
2019. One loan previously modified as a TDR, in the amount of $2.0 million re-defaulted during the year ended December 31,
2018.
6. Premises and Equipment
At December 31, 2019 and 2018, premises and equipment consisted of the following:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Right-of-use-asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31,
2019
2018
(In thousands)
2,300
$
14,169
10,084
5,339
2,505
3,337
67
2,300
14,126
—
6,082
3,584
4,155
67
37,801
(9,279)
28,522
$
30,314
(10,543)
19,771
For the years ended December 31, 2019, 2018 and 2017, depreciation and amortization expense related to premises and
equipment totaled $3.4 million, $1.7 million and $1.5 million, respectively. For the year ended December 31, 2019, depreciation
and amortization expense includes amortization of the right-of-use-asset, totaling $1.4 million.
88
7. Leases
Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). As of December 31, 2019, the Company
leases real estate for ten branch offices under various operating lease agreements. The branch leases have maturities which range
from 2020 to 2030, some of which include options to extend the lease term. The Company is not reasonably certain to exercise
these renewal options, and as a result, these optional periods are not included in determining the lease term. The weighted average
remaining life of the lease term for these leases was 6.6 years as of December 31, 2019. In addition, the Company’s headquarter
building (included in premises and equipment) is on land that is leased from the local municipality. As of December 31, 2019, the
land lease has a remaining life of 80.7 years.
The Company utilized a weighted average discount rate of 6.0% in determining the lease liability for its branch locations and
a discount rate of 5.5% for its land lease.
The total fixed operating lease costs were $2.0 million for the year ended December 31, 2019. The total variable operating
lease costs were $0.1 million for the year ended December 31, 2019. The right-of-use-asset, included in premises and equipment,
net was $10.1 million as of December 31, 2019 and the corresponding lease liability, included in accrued expenses and other
liabilities was $10.2 million as of December 31, 2019.
Future minimum lease payments as of December 31, 2019 are as follows:
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31, 2019
(In thousands)
1,901
1,797
1,164
1,171
772
17,941
24,746
A reconciliation of the undiscounted cash flows in the maturity table above and the lease liability recognized in the consolidated
balance sheet as of December 31, 2019, is shown below:
December 31, 2019
(In thousands)
Undiscounted cash flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Discount effect of cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
24,746
(14,592)
10,154
8. Other Assets
The components of other assets as of December 31, 2019 and 2018 are summarized below:
Deferred compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Servicing assets, net of valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateral posted related to interest rate swaps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In thousands)
2,763
$
978
2,266
13,450
2,739
2,618
870
2,868
—
3,681
Total Other Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
22,196
$
10,037
December 31,
2019
December 31,
2018
89
Deferred compensation
The Company has a non-qualified deferred compensation plan for the Board of Directors that allows for the deferral of fees
earned related to services rendered for the Company. The deferred compensation balance increased $0.1 million for the year ended
December 31, 2019 compared to the year ended December 31, 2018. The increase was primarily driven by contributions to the
plan.
Loan servicing
The Bank sells loans in the secondary market and retains the right to service many of these loans. The Bank earns fees for
the servicing provided. Loans serviced for others are not included in the accompanying consolidated balance sheets. The balance
of loans serviced for others was $128.3 million and $122.4 million at December 31, 2019 and 2018, respectively. The risks inherent
in servicing assets relate primarily to changes in the timing of prepayments that result from shifts in interest rates. The significant
assumptions used in the valuation at December 31, 2019 for servicing assets included a discount rate ranging from 10% to 11%
and prepayment speed assumptions ranging from 3% to 19%. The significant assumptions used in the valuation at December 31,
2018 for servicing assets included a discount rate ranging from 10% to 12% and prepayment speed assumptions ranging from 3%
to 15%.
The carrying value of loan servicing rights was $1.0 million and $0.9 million as of December 31, 2019 and 2018, respectively.
The following table presents the changes in carrying value for loan servicing assets:
December 31,
2019
December 31,
2018
(In thousands)
Loan servicing rights:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Servicing rights capitalized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Servicing rights amortized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Servicing rights disposed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
870
$
1,113
440
(141)
(153)
(38)
978
$
224
(136)
(109)
(222)
870
Included in accrued expenses and other liabilities, as of December 31, 2019 and 2018, respectively, are $63 thousand and
$73 thousand for loan servicing liabilities related to loans serviced for others for which the Company does not receive a servicing
fee.
As of December 31, 2018, the Company established a servicing asset valuation allowance in the amount of $0.2 million.
Prior to 2018, the Company was not required to have a servicing asset valuation allowance.
90
9. Deposits
At December 31, 2019 and 2018, deposits consisted of the following:
Noninterest bearing demand deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest bearing accounts:
December 31,
2019
2018
(In thousands)
191,518
$
173,198
NOW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest bearing accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,300,385
Total deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,491,903
627,141
183,729
419,495
70,020
61,869
471,968
180,487
614,722
1,329,046
$ 1,502,244
Maturities of time certificates of deposit as of December 31, 2019 and 2018 are summarized below:
December 31,
2019
2018
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(In thousands)
— $
430,361
167,933
28,515
239
93
627,141
$
411,818
171,452
30,615
579
258
—
614,722
The aggregate amount of individual certificate accounts, including brokered deposits with balances of $250,000 or more,
were approximately $307.1 million and $227.8 million at December 31, 2019 and 2018, respectively.
Brokered certificate of deposits totaled $179.8 million and $91.8 million at December 31, 2019 and 2018, respectively.
Certificates of deposits from national listing services totaled $21.3 million at December 31, 2019 and $101.5 million at December
31, 2018. Brokered money market accounts totaled $39.9 million and $84.9 million at December 31, 2019 and 2018, respectively.
The following table summarizes interest expense by account type for the years ended December 31, 2019, 2018 and 2017:
NOW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2019
2018
2017
(In thousands)
128
$
157
$
7,139
2,968
14,463
6,431
1,649
10,714
93
3,427
763
8,411
Total interest expense on deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
24,698
$
18,951
$
12,694
91
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, 2019 and
2018:
December 31,
2019
2018
Amount
Due
Weighted
Average
Rate
Amount
Due
(Dollars in thousands)
Weighted
Average
Rate
Year of Maturity:
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total advances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
150,000
150,000
—% $
1.93
1.93% $
135,000
25,000
160,000
2.55%
1.99
2.46%
$125 million of the above mentioned FHLB advances as of December 31, 2019 are subject to interest rate swap transactions,
see note 18.
Interest expense on FHLB advances totaled $3.6 million, $3.9 million and $2.0 million for the years ended December 31,
2019, 2018 and 2017, respectively.
The Bank has additional borrowing capacity at the FHLB up to a certain percentage of the value of qualified collateral. In
accordance with agreements with the FHLB, the qualified collateral must be free and clear of liens, pledges and encumbrances.
At December 31, 2019, the Company had pledged eligible loans with a book value of $933.9 million as collateral to support
borrowing capacity at the FHLB of Boston. As of December 31, 2019, the Company has immediate availability to borrow an
additional $440.4 million based on qualified collateral.
At December 31, 2019, the Bank had a secured letter of credit with the FHLB and unsecured lines of credit with Atlantic
Community Bankers Bank, Zions Bank and Texas Capital Bank. The total line of credit and the amount outstanding at December 31,
2019 is summarized below:
December 31, 2019
Total Letter or Line of
Credit
Total Outstanding
FHLB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Atlantic Community Bankers Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Zions Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas Capital Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In thousands)
10,000
$
12,000
25,000
5,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
52,000
$
—
—
—
—
—
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 74,740 shares
and 81,096 shares at December 31, 2019 and 2018, respectively. There is no ready market or quoted market values for the stock
and as such is classified as restricted stock. The shares have a par value of $100 and are carried on the consolidated balance sheets
at cost, and evaluated for impairment, as the stock is only redeemable at par subject to the redemption practices of the FHLB.
The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) the
significance of the decline in net assets of the Federal Home Loan Bank as compared to the capital stock amount and the length
of time this situation has persisted; (b) commitments by the Federal Home Loan Bank to make payments required by law or
regulation and the level of such payments in relation to the operating performance; (c) the impact of legislative and regulatory
changes on the customer base of the Federal Home Loan Bank; and (d) the liquidity position of the Federal Home Loan Bank.
Management evaluated the stock and concluded that the stock was not impaired as of December 31, 2019 or 2018.
92
11. Subordinated Debentures
On August 19, 2015, the Company completed a private placement of $25.5 million in aggregate principal amount of fixed
rate subordinated notes (the “Notes”) to certain institutional investors. The Notes are non-callable for five years, have a stated
maturity of August 15, 2025, and bear interest at a quarterly pay fixed rate of 5.75% per annum to the maturity date or the early
redemption date, August 2020 and annually thereafter.
The Notes have been structured to qualify for the Company as Tier 2 capital under regulatory guidelines. We used the net
proceeds for general corporate purposes, which included maintaining liquidity at the holding company, providing equity capital
to the Bank to fund balance sheet growth and the Company's working capital needs. The Notes were assigned an investment grade
rating of BBB by Kroll Bond Rating Agency, which was reaffirmed in the third quarter of 2019.
The Company recognized $1.5 million in interest expense related to its subordinated debt for each of the years ended December
31, 2019, 2018, and 2017.
12. Commitments and Contingencies
Leases
Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). As of December 31, 2019, the Company
leases real estate for ten branch offices under various operating lease agreements. The branch leases have maturities which range
from 2020 to 2030, some of which include options to extend the lease term. In addition, the Company’s headquarter building is
on land that is leased from the local municipality. Reference note 7 for further detail.
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 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 represent the amounts of potential accounting loss should the
contract be fully drawn upon, the customers 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, 2019 and 2018 were as follows:
December 31,
2019
2018
(In thousands)
Commitments to extend credit:
Loan commitments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Undisbursed construction loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unused home equity lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
102,986
$
190,661
80,472
6,284
68,151
7,445
$
189,742
$
266,257
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 or certain milestones in the case of construction loans or otherwise required collateral under borrowing base limits
are met. 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.
These commitments subject the Company to potential exposure in excess of amounts recorded in the financial statements,
and therefore, management maintains a specific reserve for unfunded credit commitments. This reserve is reported as a component
93
of accrued expenses and other liabilities in the accompanying Consolidated Balance Sheets. The reserve for unfunded commitments
totaled $120 thousand at December 31, 2019 and $175 thousand at December 31, 2018.
13. Income Taxes
The components of income tax expense for the years ended December 31, 2019, 2018 and 2017 consisted of:
December 31,
2019
2018
2017
(In thousands)
Current provision:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,137
$
2,251
$
313
4,450
185
2,436
6,960
431
7,391
Deferred provision:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
276
1,284
3,908
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,726
$
3,720
$
11,299
In October, 2015, the Company created Bankwell Loan Servicing Group, Inc., a Passive Investment Company (“PIC”)
organized for state income tax purposes. The PIC is a wholly-owned subsidiary of the Bank operating in accordance with Connecticut
statutes. The PIC’s activities are limited in scope to holding and managing loans that are collateralized by real estate. Income
earned by a PIC is determined in accordance with the statutory requirements for a passive investment company and the dividends
paid by the PIC to the Bank are not taxable income for Connecticut income tax purposes. As a result of the formation of the PIC,
the Bank no longer expects to be subject to Connecticut income taxes. State taxes are being recognized for income taxes on income
earned in other states.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was signed into law. As a result, the corporate tax rate was reduced
from 35% to 21%. Companies were required to recognize the effect of tax law changes in the period of enactment in accordance
with GAAP. As result of the tax law changes the Company recognized a write-down of its deferred tax asset in the amount of $3.3
million for the year ended December 31, 2017.
94
A reconciliation of the anticipated income tax expense, computed by applying the statutory federal income tax rate of 21%
for the years ended December 31, 2019 and 2018 and 35% for the year ended December 31, 2017 to the income before income
taxes, to the amount reported in the consolidated statements of income for the years ended December 31, 2019, 2018, and 2017
was as follows:
December 31,
2019
2018
2017
Income tax expense at statutory federal rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
State tax expense, net of federal tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statutory rate reductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income exempt from tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits related to stock compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred director fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other items, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
223
—
(368)
(3)
(14)
70
(In thousands)
4,818
$
4,442
$
8,795
280
3,270
(822)
(490)
—
266
99
—
(403)
(68)
(100)
(250)
3,720
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,726
$
$
11,299
At December 31, 2019 and 2018, the components of deferred tax assets and liabilities were as follows:
December 31,
2019
2018
(In thousands)
Deferred tax assets:
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred director fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Start-up costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Deferred expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase accounting adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Right-Of-Use-Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,862
$
481
1,120
174
91
2,245
—
2,132
302
9,407
671
192
45
210
—
247
2,117
137
3,619
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5,788
$
3,284
518
1,152
31
118
—
367
—
204
5,674
628
166
61
382
90
—
—
—
1,327
4,347
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. Management evaluated its remaining deferred tax assets
and believes no valuation allowances are needed at December 31, 2019.
95
At December 31, 2019, the Company had federal net operating loss carryovers of $2.3 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 annum.
Management regularly analyzes their tax positions and at December 31, 2019 management has established a reserve for
uncertain tax positions in conjunction with the Company's out of state lending activity. The total reserve for uncertain tax positions
totaled $269 thousand as of December 31, 2019. The tax years 2016 and subsequent are subject to examination by federal and
state taxing authorities. The statute of limitations has expired on the years before 2016. No examinations are currently in process.
The following table reflects a reconciliation of the beginning and ending balances of the Company’s uncertain tax positions:
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net additions (reductions) relating to potential liability with taxing authorities . . . .
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
14. 401(K) Profit Sharing Plan
At December 31,
2019
2018
2017
(In thousands)
393
$
(200)
193
$
$
$
193
76
269
95
298
393
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 at least 21 years of age. Under the terms
of the 401k Plan, participants can contribute up to a certain percentage of their compensation, subject to federal limitations. The
Company matches eligible 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 expensed $252 thousand, $265 thousand and $257 thousand related to the 401k Plan during the years
ended December 31, 2019, 2018 and 2017, respectively.
15. 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.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Dividends to participating securities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Undistributed earnings allocated to participating securities(1) . . . . . . . . . . . . . . . . . .
Net income for earnings per share calculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average shares outstanding, basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of dilutive equity-based awards(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average shares outstanding, diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings per common share:
For the Years Ended December 31,
2019
2018
2017
(In thousands, except per share data)
$
$
18,216
(46)
(166)
18,004
7,757
28
7,785
$
$
17,433
(51)
(178)
17,204
7,722
53
7,775
13,830
(28)
(151)
13,651
7,572
98
7,670
Basic earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2.32
2.31
$
$
2.23
2.21
$
$
1.80
1.78
(1) Represents dividends paid and undistributed earnings allocated to unvested stock-based awards that contain non-forfeitable rights to dividends.
96
(2) Represents the effect of the assumed exercise of stock options and warrants and the vesting of restricted shares, as applicable, utilizing the treasury stock
method.
16. Stock Based Compensation
Equity award plans
The Company has stock options or unvested restricted stock outstanding under three equity award plans, which are collectively
referred to as the “Plan.” The current plan under which any future issuances of equity awards will be made is the 2012 BNC
Financial Group, Inc. Stock Plan, or the “2012 Plan,” last amended on June 26, 2013. 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. To date, all equity awards
have been in the form of stock options or restricted stock. At December 31, 2019, there were 645,132 shares reserved for future
issuance under the 2012 Plan.
Stock options: The Company accounts for stock options based on the fair value at the date of grant and records an expense
over the vesting period of such awards on a straight line basis.
There were no options granted during the years ended December 31, 2019, 2018 or 2017.
A summary of the status of outstanding stock options at December 31, 2019 is presented below:
December 31, 2019
Number of
Shares
Weighted
Average
Exercise
Price
Options outstanding at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options outstanding at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
19,030
(2,350)
16,680
15.91
13.14
16.30
Options exercisable at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,680
16.30
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 stock options exercised during the years ended December 31, 2019, 2018 and 2017 was
$40.0 thousand, $0.4 million and $1.1 million, respectively.
The range of exercise prices for the 16,680 options exercisable at December 31, 2019 was $11.00 to $17.86 per share. The
weighted average remaining contractual life for these options was 2.5 years at December 31, 2019. At December 31, 2019, as all
awarded options have vested, all of the outstanding options are exercisable, and the aggregate intrinsic value of these options was
$0.2 million.
The following table summarizes information for options, all of which are both outstanding and exercisable, at December 31,
2019:
Range of Exercise Prices
$11.00–17.86 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-
Average
Remaining
Contractual Life
(years)
Weighted-
Average
Exercise Price
Number of
Shares
16,680
2.5
$
16.30
Restricted stock: Restricted stock provides grantees with rights to shares of common stock upon completion of a service
period. Shares of unvested restricted stock are considered participating securities. Restricted stock awards generally vest over one
to five years.
97
The following table presents the activity for restricted stock for the year ended December 31, 2019:
Unvested at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unvested at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) Includes 11,250 shares of performance based restricted stock
(2) Includes 12,000 shares of performance based restricted stock
December 31, 2019
Number of
Shares
77,624 (1) $
64,150 (2)
(24,999)
(5,800)
110,975
Weighted
Average
Grant Date
Fair Value
30.78
29.65
28.46
26.34
30.88
The total fair value of restricted stock awards vested during the year ended December 31, 2019 was $0.7 million.
The Company’s restricted stock expense for the years ended December 31, 2019, 2018 and 2017 was $1.0 million, $1.3
million and $0.9 million, respectively. At December 31, 2019, there was $1.7 million of unrecognized stock compensation expense
for restricted stock, expected to be recognized over a weighted average period of 1.6 years.
Performance based restricted stock: On February 20, 2018, the Company issued 11,250 shares of restricted stock with
performance and service conditions pursuant to the Company's 2012 Stock Plan. On March 18, 2019, the Company issued 7,500
shares of restricted stock with performance and service conditions pursuant to the Company’s 2012 Stock Plan. On December 20,
2019, the Company issued 4,500 shares of restricted stock with performance and service conditions pursuant to the Company's
2012 Stock Plan. The awards vest over a three-year service period, provided certain performance metrics are met. The share
quantity, which can range between 0% and 200%, of the grant is dependent on the degree to which the performance metrics are
met. The Company records an expense over the vesting period based on (a) the probability that the performance metric will be
met and (b) the fair market value of the Company’s stock at the date of the grant.
17. 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 years ended December 31, 2019, 2018 and
2017 is reported in the Consolidated Statements of Comprehensive Income.
The following tables present the changes in accumulated other comprehensive (loss) income by component, net of tax for
the years ended December 31, 2019, 2018 and 2017:
Net Unrealized
Gain
(Loss) on
Available
for Sale
Securities
Net Unrealized
Gain
(Loss) on
Interest
Rate Swaps
(In thousands)
Balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive income (loss) before reclassifications, net of tax. . . . .
Amounts reclassified from accumulated other comprehensive income, net
of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(1,379) $
2,367
(60)
2,307
928
$
$
342
(8,786)
—
(8,786)
(8,444) $
Total
(1,037)
(6,419)
(60)
(6,479)
(7,516)
98
Net Unrealized
Gain
(Loss) on
Available
for Sale
Securities
Net Unrealized
Gain
(Loss) on
Interest
Rate Swaps
(In thousands)
Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive loss before reclassifications, net of tax . . . . . . . . . . . .
Amounts reclassified from accumulated other comprehensive
income, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
$
85
(1,289)
(175)
(1,464)
(1,379) $
$
1,609
(1,267)
—
(1,267)
342
$
Net Unrealized
Gain
(Loss) on
Available
for Sale
Securities
Net Unrealized
Gain
(Loss) on
Interest
Rate Swaps
(In thousands)
Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive (loss) income before reclassifications, net of tax. . . . .
Amounts reclassified from accumulated other comprehensive income, net
of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net other comprehensive (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts reclassified for tax rate change . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
$
409
(232)
(108)
(340)
16
$
481
843
—
843
285
Total
1,694
(2,556)
(175)
(2,731)
(1,037)
Total
890
611
(108)
503
301
85
$
1,609
$
1,694
The following table provides information for the items reclassified from accumulated other comprehensive income or loss:
Accumulated Other Comprehensive
Income (Loss) Components
For the Years Ended December 31,
2019
2018
2017
(In thousands)
Associated Line Item in the Consolidated
Statements Of Income
Available-for-sale securities:
Unrealized gains on investments . . . . . . .
Tax expense . . . . . . . . . . . . . . . . . . . . . . .
Net of tax. . . . . . . . . . . . . . . . . . . . . . . .
18. Derivative Instruments
$
$
76
(16)
60
$
$
222
(47)
175
$
$
165 Net gain on sale of available for sale securities
(57)
108
Income tax expense
The Company manages economic risks, including interest rate, liquidity, and credit risk by managing the amount, sources,
and duration of its funding along with the use of interest rate derivative financial instruments, namely interest rate swaps. The
Company does not use derivatives for speculative purposes. As of December 31, 2019, the Company was a party to seven interest
rate swaps, designated as hedging instruments, to add stability to interest expense and to manage its exposure to interest rate
movements. The notional amount for each swap is $25 million and in each case, the Company has entered into pay-fixed LIBOR
interest rate swaps to convert rolling 90 days Federal Home Loan Bank advances or brokered deposits. In addition, as of
December 31, 2019, the Company was a party to two forward-starting interest rate swaps on probable future FHLB advances or
brokered deposits. As of December 31, 2019, the Company entered into two interest rate swaps not designated as hedging
instruments, to minimize interest rate risk exposure with loans to customers.
The Company accounts for all non-borrower related interest rate swaps as effective cash flow hedges. None of the interest
rate swap agreements contain any credit risk related contingent features. A hedging instrument is expected at inception to be highly
effective at offsetting changes in the hedged transactions attributable to the changes in the hedged risk.
Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain loan
customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk
management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes
with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate
99
derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both
the customer derivatives and the offsetting derivatives are recognized directly in earnings.
Interest rate swaps with a positive fair value are recorded as other assets and interest rate swaps with a negative fair value
are recorded as other liabilities on the Consolidated Balance Sheets. Information about derivative instruments for the years ended
December 31, 2019 and 2018 were as follows:
December 31, 2019:
Derivatives designated as
hedging instruments:
Notional
Amount
Original
Maturity
Maturity Date
Received
Paid
(Dollars in thousands)
Fair Value
Asset
(Liability)
Interest rate swap. . . . . . . . . . . . . $
25,000
5.0 years
Interest rate swap. . . . . . . . . . . . .
25,000
5.0 years
Interest rate swap. . . . . . . . . . . . .
25,000
5.0 years
Interest rate swap. . . . . . . . . . . . .
25,000
7.0 years
Interest rate swap. . . . . . . . . . . . .
25,000
7.0 years
Interest rate swap. . . . . . . . . . . . .
25,000
15.0 years
January 1, 2020
August 26, 2020
July 1, 2021
August 25. 2024
August 25. 2024
January 1, 2034
Interest rate swap. . . . . . . . . . . . .
Forward-starting interest rate
swap(1) . . . . . . . . . . . . . . . . . . . . .
Forward-starting interest rate
swap(1) . . . . . . . . . . . . . . . . . . . . .
Derivatives not designated as
hedging instruments:(2)
25,000
3.0 years
December 23, 2022
25,000
15.0 years
25,000
15.0 years
$ 225,000
January 1, 2035
August 26, 2035
3-month USD
LIBOR
3-month USD
LIBOR
3-month USD
LIBOR
3-month USD
LIBOR
3-month USD
LIBOR
3-month USD
LIBOR
3-month USD
LIBOR
3-month USD
LIBOR
3-month USD
LIBOR
Interest rate swap. . . . . . . . . . . . . $
20,000
20.0 years
Interest rate swap. . . . . . . . . . . . .
20,000
20.0 years
$
40,000
Total Derivatives . . . . . . . . . . . . . $ 265,000
March 10, 2039
March 10, 2039
1-month USD
LIBOR
1-month USD
LIBOR
1.83% $
1.48%
—
51
1.22%
174
2.04%
(396)
2.04%
(402)
3.01%
(3,328)
1.28%
279
3.03%
(3,557)
3.05%
(3,512)
$ (10,691)
5.00% $ (1,762)
5.00%
1,762
—
$
$ (10,691)
(1) The effective date of the forward-starting interest rate swaps listed above are January 2, 2020 and August 26, 2020, respectively.
(2) Represents an interest rate swap with a commercial banking customer, which is offset by a derivative with a third party.
Accrued interest receivable related to interest rate swaps as of December 31, 2019 totaled $21.6 thousand and is excluded
from the fair value presented in the table above. The fair value of interest rate swaps in a net liability position, including accrued
interest, totaled $10.7 million as of December 31, 2019.
100
December 31, 2018:
Derivatives designated as
hedging instruments:
Notional
Amount
Original
Maturity
Maturity Date
Received
Paid
(Dollars in thousands)
Fair Value
Asset
(Liability)
Interest rate swap. . . . . . . . . . . . . . . $
25,000
4.7 years
Interest rate swap. . . . . . . . . . . . . . .
25,000
5.0 years
Interest rate swap. . . . . . . . . . . . . . .
25,000
5.0 years
Interest rate swap. . . . . . . . . . . . . . .
25,000
5.0 years
Interest rate swap. . . . . . . . . . . . . . .
25,000
7.0 years
Interest rate swap. . . . . . . . . . . . . . .
Forward-starting interest rate
swap(1) . . . . . . . . . . . . . . . . . . . . . . .
Forward-starting interest rate
swap(1) . . . . . . . . . . . . . . . . . . . . . . .
Forward-starting interest rate
swap(1) . . . . . . . . . . . . . . . . . . . . . . .
25,000
7.0 years
25,000
15.0 years
25,000
15.0 years
January 1, 2019
January 1, 2020
August 26, 2020
July 1, 2021
August 25, 2024
August 25, 2024
January 1, 2034
January 1, 2035
25,000
15.0 years
August 26, 2035
$ 225,000
3-month USD
LIBOR
3-month USD
LIBOR
3-month USD
LIBOR
3-month USD
LIBOR
3-month USD
LIBOR
3-month USD
LIBOR
3-month USD
LIBOR
3-month USD
LIBOR
3-month USD
LIBOR
1.62% $
1
1.83%
1.48%
1.22%
2.04%
2.04%
220
475
828
675
668
3.01%
(807)
3.03%
(819)
3.05%
(811)
430
$
(1) The effective date of the forward-starting interest rate swaps listed above are January 2, 2019, January 2, 2020 and August 26, 2020,
respectively.
Accrued interest receivable related to interest rate swaps as of December 31, 2018 totaled $0.2 million and is excluded from
the fair value presented in the table above. The fair value of interest rate swaps including accrued interest totaled $0.7 million as
of December 31, 2018.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded
in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted
transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be
reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. The Company expects to
reclassify $0.6 million as an increase to interest expense during the next 12 months.
The Company 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 interest rate swap assets are presented in other assets and the interest rate swap liabilities are presented in accrued expenses
and other liabilities in the Consolidated Balance Sheets. The Company does not offset derivative assets and derivative liabilities
for financial statement presentation purposes.
101
The Company's cash flow hedge positions consist of interest rate swap transactions as detailed in the table below:
Notional
Amount
$25,000
25,000
25,000
25,000
25,000
25,000
25,000
$175,000
Effective Date of
Hedging Relationship
Duration of
Interest Rate Swap
(Dollars in thousands)
January 2, 2015
August 26, 2015
July 1, 2016
August 25, 2017
August 25, 2017
January 2, 2019
December 27, 2019
5.0 years
5.0 years
5.0 years
7.0 years
7.0 years
15.0 years
3.0 years
Counterparty
Bank of Montreal
Bank of Montreal
Bank of Montreal
Bank of Montreal
FHN Financial Capital
Markets
Bank of Montreal
Bank of Montreal
This hedge strategy converts the rate of interest on short-term rolling FHLB advances or brokered deposits to long-term fixed
interest rates, thereby protecting the Company from 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 years ended December 31, 2019, 2018 and 2017:
December 31,
2019
December 31,
2018
(In thousands)
December 31,
2017
Interest rate swap on FHLB advances and brokered deposits:
Unrealized loss recognized in accumulated other comprehensive income . . . . . $
Income tax benefit on items recognized in accumulated other comprehensive
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount recognized in interest expense on hedged FHLB advances and
brokered deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(11,121) $
(1,604) $
1,297
2,335
(8,786)
337
(1,267)
(454)
843
2,949
$
2,552
$
1,909
The above unrealized gains and losses are reflective of market interest rates as of the respective balance sheet dates. Generally,
a lower interest rate environment will result in a negative impact to comprehensive income whereas a higher interest rate
environment will result in a positive impact to comprehensive income.
The following tables summarize gross and net information about derivative instruments that are offset in the Consolidated
Balance Sheets at December 31, 2019 and 2018:
December 31, 2019
(In thousands)
Gross Amounts of
Recognized
Assets(1)
Gross Amounts
Offset in the
Statement of
Financial Position
Net Amounts of
Assets presented
in the Statement
of Financial
Position
Financial
Instruments
Cash Collateral
Received
Net Amount
Gross Amounts Not Offset in the Consolidated Balance Sheets
Derivative
Assets. . . . . . . . $
2,363
$
— $
2,363
$
591
$
— $
1,772
(1) Includes accrued interest receivable totaling $97.1 thousand.
102
December 31, 2019
(In thousands)
Gross Amounts of
Recognized
Liabilities(1)
Gross Amounts
Offset in the
Statement of
Financial Position
Net Amounts of
Liabilities
presented in the
Statement of
Financial Position
Financial
Instruments
Cash Collateral
Posted(2)
Net Amount
Gross Amounts Not Offset in the Consolidated Balance Sheets
Derivative
Liabilities . . . . . $
13,032
$
— $
13,032
$
591
$
12,441
$
—
(1) Includes accrued interest payable totaling $75.5 thousand.
(2) Actual cash collateral posted totaled $13.5 million, total cash collateral posted in the above table represents the total value to net the
derivative liabilities to $0.
December 31, 2018
(In thousands)
Gross Amounts of
Recognized
Assets(1)
Gross Amounts
Offset in the
Statement of
Financial Position
Net Amounts of
Assets presented
in the Statement
of Financial
Position
Financial
Instruments
Cash Collateral
Received
Net Amount
Gross Amounts Not Offset in the Consolidated Balance Sheets
Derivative
Assets . . . . . . . . $
3,091
$
— $
3,091
$
2,310
$
60
$
721
(1) Includes accrued interest receivable totaling $0.2 million
In addition to cash collateral received the Company has also received investment securities as collateral with a fair market
value of $1.2 million as of December 31, 2018.
December 31, 2018
(In thousands)
Gross Amounts of
Recognized Assets
Gross Amounts
Offset in the
Statement of
Financial Position
Net Amounts of
Assets presented
in the Statement
of Financial
Position
Financial
Instruments
Cash Collateral
Received
Net Amount
Gross Amounts Not Offset in the Consolidated Balance Sheets
Derivative
Liabilities . . . . . $
2,437
$
— $
2,437
$
2,310
$
— $
127
103
19. Fair Value of Financial Instruments
GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the Consolidated
Balance Sheets, 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 the Company’s financial instruments; however, there are
inherent limitations in any estimation technique. Therefore, 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.
The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations.
As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change
may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the
extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay
in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving
fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate
environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk.
The carrying values, fair values and placement in the fair value hierarchy of the Company’s financial instruments at
December 31, 2019 and 2018 were as follows:
December 31, 2019
Carrying
Value
Fair
Value
Level 1
Level 2
Level 3
(In thousands)
Financial Assets:
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . $
Marketable equity securities . . . . . . . . . . . . . . . . . . .
Available for sale securities. . . . . . . . . . . . . . . . . . . .
Held to maturity securities. . . . . . . . . . . . . . . . . . . . .
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . .
FHLB stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Servicing asset, net of valuation allowance. . . . . . . .
Derivative asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Liabilities:
Noninterest bearing deposits . . . . . . . . . . . . . . . . . . . $
NOW and money market. . . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . .
Advances from the FHLB . . . . . . . . . . . . . . . . . . . . .
Subordinated debentures . . . . . . . . . . . . . . . . . . . . . .
Servicing liability . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative liability. . . . . . . . . . . . . . . . . . . . . . . . . . .
78,051
$
78,051
$
78,051
$
2,118
82,439
16,308
2,118
82,439
18,307
1,588,840
1,589,732
5,959
7,475
978
2,266
5,959
7,475
978
2,266
2,118
10,031
—
—
—
—
—
—
— $
—
72,408
85
—
—
—
18,222
— 1,589,732
5,959
7,475
—
2,266
191,518
$
191,518
$
— $
191,518
$
489,515
183,729
632,436
2,142
150,006
25,530
63
12,957
—
—
—
—
—
—
—
—
489,515
183,729
—
2,142
—
—
—
12,957
489,515
183,729
627,141
2,142
150,000
25,207
63
12,957
104
—
—
978
—
—
—
—
632,436
—
150,006
25,530
63
—
December 31, 2018
Carrying
Value
Fair
Value
Level 1
Level 2
Level 3
(In thousands)
Financial Assets:
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . $
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable equity securities . . . . . . . . . . . . . . . . . . .
Available for sale securities. . . . . . . . . . . . . . . . . . . .
Held to maturity securities. . . . . . . . . . . . . . . . . . . . .
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . .
FHLB stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Servicing asset, net of valuation allowance. . . . . . . .
Derivative asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Liabilities:
Noninterest bearing deposits . . . . . . . . . . . . . . . . . . . $
NOW and money market. . . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . .
Advances from the FHLB . . . . . . . . . . . . . . . . . . . . .
Subordinated debentures . . . . . . . . . . . . . . . . . . . . . .
Servicing liability . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative liability. . . . . . . . . . . . . . . . . . . . . . . . . . .
— 1,584,858
75,411
$
75,411
$
75,411
$
— $
2,701
2,009
93,154
21,421
2,701
2,009
93,154
21,988
1,586,775
1,584,858
6,375
8,110
870
2,867
6,375
8,110
870
2,867
2,701
2,009
9,798
—
—
—
—
—
—
—
—
83,356
1,098
6,375
8,110
—
2,867
173,198
$
173,198
$
— $
173,198
$
533,837
180,487
614,722
1,381
160,000
25,155
73
2,437
533,837
180,487
616,973
1,381
159,753
24,211
73
2,437
—
—
—
—
—
—
—
—
533,837
180,487
—
1,381
—
—
—
2,437
—
—
—
—
20,890
—
—
870
—
—
—
—
616,973
—
159,753
24,211
73
—
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 accrued interest payable: The carrying amount
is a reasonable estimate of fair value.
Marketable equity securities, available for sale securities and held to maturity 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 majority of the available for sale securities are considered to be Level 2 as other observable inputs
are utilized, such as quoted prices for similar securities. Level 1 investment securities include investments in a U.S. treasury note
and in marketable equity securities for which a quoted price is readily available in the market. Level 3 held to maturity securities
represent private placement municipal housing authority bonds for which no quoted market price is available. The fair value for
these securities is estimated using a discounted cash flow model, using discount rates ranging from 3.8% to 4.1% as of December 31,
2019 and 4.7% to 5.1% as of December 31, 2018. These securities are CRA eligible investments.
FHLB stock: The carrying value of FHLB stock approximates fair value based on the most recent redemption provisions of
the FHLB.
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 rates
at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair
value methodology includes prepayment, default and loss severity assumptions applied by type of loan. The fair value estimate
of the loans includes an expected credit loss.
Derivative asset (liability): The valuation of the Company’s interest rate swaps 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.
The Company also considers the creditworthiness of each counterparty for assets and the creditworthiness of the Company for
liabilities.
105
Servicing Asset (liability): Servicing assets and liabilities do not trade in an active, open market with readily observable
prices. The Company estimates the fair value of servicing assets and liabilities using discounted cash flow models, incorporating
numerous assumptions from the perspective of a market participant, including market discount rates.
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.
Borrowings and Subordinated Debentures: The fair value of the Company’s borrowings and subordinated debentures is
estimated using a discounted cash flow calculation that applies discount rates currently offered based on similar maturities. The
Company also considers its own creditworthiness in determining the fair value of its borrowings and subordinated debt. Contractual
cash flows for the subordinated debt are reduced based on the estimated rates of default, the severity of losses to be incurred on
a default, and the rates at which the subordinated debt is expected to prepay after the call date.
Off-balance-sheet instruments: Loan commitments on which the committed interest rate is less than the current market rate
are insignificant at December 31, 2019 and 2018.
20. 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.
Financial instruments measured at fair value on a recurring basis
The following table details the financial instruments carried at fair value on a recurring basis at December 31, 2019 and 2018,
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, 2019 and 2018.
106
Level 1
Fair Value
Level 2
(In thousands)
Level 3
December 31, 2019
Marketable equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Available for sale investment securities: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Government and agency obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,118
$
— $
10,031
—
—
72,408
2,266
12,957
December 31, 2018
Marketable equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Available for sale investment securities:
2,009
$
— $
U.S. Government and agency obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State agency and municipal obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,798
72,338
—
—
—
—
4,007
7,011
2,867
2,437
—
—
—
—
—
—
—
—
—
—
Marketable equity securities and available for sale securities: The fair value of the Company’s investment securities is
estimated by using pricing models or quoted prices of securities with similar characteristics (i.e. matrix pricing) and is classified
within Level 1 or Level 2 of the valuation hierarchy. The pricing is primarily sourced from third party pricing services, overseen
by management.
Derivative assets and liabilities: The Company’s derivative assets and liabilities consist of transactions as part of
management’s strategy to manage interest rate risk. The valuation of the Company’s interest rate swaps 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. 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
Certain assets and liabilities are measured at fair value on a non-recurring basis in accordance with GAAP. These include
assets that are measured 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.
The following table details the financial instruments measured at fair value on a nonrecurring basis at December 31, 2019
and 2018, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:
Level 1
Fair Value
Level 2
(In thousands)
Level 3
December 31, 2019
Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Servicing asset, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2018
Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Servicing asset, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $
—
— $
—
— $
—
— $
—
22,047
915
18,709
797
107
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, 2019 and 2018:
December 31, 2019
Impaired loans . . . . . . . . . . . . . . . . .
$
$
Servicing asset, net. . . . . . . . . . . . . . $
December 31, 2018
Impaired loans . . . . . . . . . . . . . . . . .
Servicing asset, net. . . . . . . . . . . . . .
$
$
$
Fair
Value
Valuation
Methodology
Unobservable
Input
Range
(Dollars in thousands)
12,300 Appraisals
Discounted cash
flows
9,747
22,047
Discounted cash
flows
915
10,188 Appraisals
Discounted cash
flows
8,521
18,709
797
Discounted cash
flows
Discount to
appraised value
8.00–28.00%
Discount rate
3.60–7.00%
Discount rate
10.00-11.00% (1)
Prepayment rate
3.00-19.00%
Discount to
appraised value
5.00–8.00%
Discount rate
3.25–8.00%
Discount rate
10.00-12.00% (2)
Prepayment rate
3.00-15.00%
(1) Servicing liabilities totaling $63 thousand were valued using a discount rate of 1.6%.
(2) Servicing liabilities totaling $73 thousand were valued using a discount rate of 2.8%.
Impaired loans: Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records
nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible
portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral-dependent loans
calculated in 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.
Servicing assets and liabilities: When loans are sold, on a servicing retained basis, servicing rights are initially recorded at
fair value. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights
to be amortized. The fair value of servicing assets and liabilities are not measured on an ongoing basis but are subject to fair value
adjustments when and if the assets or liabilities are deemed to be impaired.
108
21. 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 maintain capital ratios 100 to 200 basis points higher than the minimum guidelines.
The Basel III Capital Rules also change the risk weights assigned to certain assets. The Basel III Capital Rules assigned a
higher risk weight (150%) to loans that are more than 90 days past due or are on nonaccrual status and to certain commercial real
estate facilities that finance the acquisition, development or construction of real property. The Basel III Capital Rules also alter
the risk weighting for other assets, including marketable equity securities that are risk weighted generally at 300%. The Basel III
Capital Rules require certain components of accumulated other comprehensive income (loss) to be included for purposes of
calculating regulatory capital requirements unless a one-time opt-out is exercised. The Bank did exercise its opt-out option and
will excludes the unrealized gain (loss) on investment securities component of accumulated other comprehensive income (loss)
from regulatory capital.
The Basel III Capital Rules limit a banking organization’s capital distributions and certain discretionary bonus payments to
executive officers if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity
to risk weighted assets, in addition to the amount necessary to meet its minimum risk-based capital requirements described above.
As of January 1, 2019, the "capital conservation buffer" increased from 1.875%, to 2.5%.
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.
As of December 31, 2019, the Bank and Company met all capital adequacy requirements to which they are subject. There
are no conditions or events since then that management believes have changed this conclusion.
The capital amounts and ratios for the Bank and the Company at December 31, 2019 were as follows:
Actual Capital
Minimum Regulatory
Capital Required for
Capital Adequacy plus
Capital Conservation Buffer
Minimum Regulatory
Capital to be Well
Capitalized Under Prompt
Corrective Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
Bankwell Bank
December 31, 2019
Common Equity Tier 1 Capital to Risk-
Weighted Assets . . . . . . . . . . . . . . . . . . . . . . . $ 205,856
219,365
Total Capital to Risk-Weighted Assets. . . . . .
Tier I Capital to Risk-Weighted Assets . . . . .
Tier I Capital to Average Assets. . . . . . . . . . .
205,856
205,856
12.53% $ 115,040
7.00% $ 106,823
13.35%
12.53%
10.99%
172,560
139,691
74,951
10.50%
8.50%
4.00%
164,343
131,474
93,689
6.50%
10.00%
8.00%
5.00%
Bankwell Financial Group, Inc.
December 31, 2019
Common Equity Tier 1 Capital to Risk-
Weighted Assets . . . . . . . . . . . . . . . . . . . . . . .
Total Capital to Risk-Weighted Assets. . . . . .
Tier I Capital to Risk-Weighted Assets . . . . .
Tier I Capital to Average Assets. . . . . . . . . . .
187,155
225,871
187,155
187,155
11.37%
13.72%
11.37%
9.97%
115,253
172,880
139,950
75,067
7.00%
10.50%
8.50%
4.00%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
109
The capital amounts and ratios for the Bank and Company at December 31, 2018 were as follows:
Actual Capital
Minimum Regulatory
Capital Required for
Capital Adequacy plus
Capital Conservation Buffer
Minimum Regulatory
Capital to be Well
Capitalized Under Prompt
Corrective Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
Bankwell Bank
December 31, 2018
Common Equity Tier 1 Capital to Risk-
Weighted Assets . . . . . . . . . . . . . . . . . . . . . . . $ 191,128
Total Capital to Risk-Weighted Assets. . . . . .
206,593
Tier I Capital to Risk-Weighted Assets . . . . .
Tier I Capital to Average Assets. . . . . . . . . . .
191,128
191,128
11.56% $ 105,392
6.38% $ 107,459
12.50%
11.56%
10.14%
163,255
130,190
75,432
9.88%
7.88%
4.00%
165,321
132,257
94,290
6.50%
10.00%
8.00%
5.00%
Bankwell Financial Group, Inc.
December 31, 2018
Common Equity Tier 1 Capital to Risk-
Weighted Assets . . . . . . . . . . . . . . . . . . . . . . .
Total Capital to Risk-Weighted Assets. . . . . .
Tier I Capital to Risk-Weighted Assets . . . . .
Tier I Capital to Average Assets. . . . . . . . . . .
172,415
213,035
172,415
172,415
10.41%
12.86%
10.41%
9.13%
105,575
163,537
130,416
75,567
6.38%
9.88%
7.88%
4.00%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
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 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.
Reserve requirements on cash
The Bank is required to maintain a minimum reserve balance of $14.1 million and $16.8 million in the Federal Reserve Bank
at December 31, 2019 and 2018, respectively. This balance is maintained for clearing purposes in the ordinary course of business
and does not represent restricted cash.
22. 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, 2019 and 2018 were as follows:
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additional loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of changes in related parties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31,
2019
2018
(In thousands)
8,673
$
20,721
—
(3,573)
(5,034)
66
$
1,702
(9,417)
(4,333)
8,673
Related party deposits aggregated approximately $45.9 million and $46.7 million at December 31, 2019 and 2018, respectively.
During the years ended December 31, 2019 and 2018, the Company paid approximately $26 thousand and $60 thousand,
respectively, to related parties for services provided to the Company. The payments were primarily for consulting and legal services.
110
23. Parent Company Only Financial Statements
Bankwell Financial Group, Inc., The Parent Company, operates its wholly-owned subsidiary, Bankwell Bank. The earnings
of this subsidiary are recognized by the Parent Company using the equity method of accounting. Accordingly, earnings are recorded
as increases in the Parent Company’s investment in the subsidiary and dividends paid reduce the investment in the subsidiary.
Condensed financial statements of the Parent Company only are as follows:
Condensed Statements of Financial Condition
ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Investment in subsidiary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
LIABILITIES AND SHAREHOLDERS’ EQUITY
Subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Condensed Statements of Income
At December 31,
2019
2018
(In Thousands)
6,418
$
6,349
201,097
192,909
7
187
2,853
210,562
25,207
2,958
$
$
11
129
2,937
202,335
25,155
2,984
182,397
174,196
210,562
$
202,335
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Dividend income from subsidiary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before equity in undistributed earnings of subsidiaries . . . . . . . . . . . .
Equity in undistributed earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended December 31,
2019
2018
2017
(In Thousands)
17
$
15
$
7,500
7,517
3,488
4,029
4,000
4,015
3,444
571
14,187
16,862
13
—
13
2,295
(2,282)
16,112
18,216
$
17,433
$
13,830
111
Condensed Statements of Cash Flows
Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to net cash used by operating activities:
Equity in undistributed earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease (increase) in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in deferred income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease) increase in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities
Decrease in premises and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities
Proceeds from exercise of options & warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid on common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents:
For the Years Ended December 31,
2019
2018
2017
(In Thousands)
18,216
$
17,433
$
13,830
(14,187)
84
(57)
(26)
1,020
52
5,102
4
4
30
(4,079)
(988)
(5,037)
69
(16,862)
6,131
(76)
(1,296)
1,290
52
6,672
6
6
936
(3,759)
—
(2,823)
3,855
(16,112)
(5,179)
3,010
380
917
52
(3,102)
37
37
2,031
(2,149)
—
(118)
(3,183)
Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
6,349
2,494
6,418
$
6,349
$
5,677
2,494
Supplemental disclosures of cash flows information:
Cash paid for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
—
—
112
24. Quarterly Financial Information of Bankwell Financial Group, Inc. (Unaudited)
The following tables present selected quarterly financial information (unaudited):
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
2019
Total interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (credit) for loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(Dollars in thousands, except per share amounts)
19,933
$
20,493
$
21,046
$
21,476
7,051
12,882
310
1,048
9,224
4,396
924
3,472
0.44
0.44
$
$
$
7,482
13,011
773
1,552
8,672
5,118
1,030
4,088
0.52
0.52
$
$
$
2018
7,451
13,595
(841)
1,336
8,755
7,017
1,441
5,576
0.71
0.71
$
$
$
7,203
14,273
195
1,308
8,975
6,411
1,331
5,080
0.65
0.65
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
(Dollars in thousands, except per share amounts)
Total interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,543
$
20,500
$
19,414
$
18,607
7,076
14,467
6,254
14,246
5,506
13,908
4,902
13,705
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,795
601
8,796
3,477
216
3,261
0.42
0.41
$
$
$
322
859
8,870
5,913
1,056
4,857
0.62
0.62
$
$
$
310
1,107
8,764
5,941
1,226
4,715
0.60
0.60
$
$
$
13
1,333
9,203
5,822
1,222
4,600
0.59
0.59
Note: Due to rounding, quarterly earnings per share may not sum to reported annual earnings per share.
During the fourth quarter of 2018, the Company recognized a $6.2 million charge-off attributable to one lending relationship.
113
25. Subsequent Events
The Company's Board of Directors declared a $0.14 per share cash dividend, payable February 24, 2020 to shareholders of
record on February 14, 2020, representing an 8% increase when compared to the prior quarter's dividend.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and
Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of Bankwell’s disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the
end of the period covered by this report. Based upon that evaluation, management, including the Chief Executive Officer and
Chief Financial Officer, concluded that Bankwell’s disclosure controls and procedures were effective as of the end of the period
covered by this report.
Internal Control over Financial Reporting
Bankwell’s management has issued a report on its assessment of the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2019. As of December 31, 2019, senior management concluded that Bankwell maintained
effective internal control over financial reporting.
There were no changes made in the Company's internal control over financial reporting that occurred during the fiscal quarter
ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting. The report of the Company's management follows.
Management’s Report on Internal Control over Financial Reporting
The management of Bankwell Financial Group and its Subsidiaries is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended).
The Company’s internal control over financial reporting is a process designed under the supervision of its Chief Executive Officer
and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019
based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Based on management’s assessment, management concluded that, as of December 31, 2019, the Company’s internal control
over financial reporting was effective based on criteria established in Internal Control-Integrated Framework (2013) issued by
COSO.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of the effectiveness to future periods are subject to the risk that the controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
The Company's independent registered public accounting firm, RSM US LLP, has audited the effectiveness of the Company's
internal control over financial reporting as of December 31, 2019, as stated in their audit report appearing below.
114
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Bankwell Financial Group, Inc.
Opinion on the Internal Control Over Financial Reporting
We have audited Bankwell Financial Group Inc. and subsidiaries’ (the Company) internal control over financial reporting as of
December 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the 2019 Consolidated Financial Statements of the Company and our report dated February 28, 2020 expressed an
unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect
to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.
Our audit also included performing such other procedures, as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ RSM US LLP
New Haven, Connecticut
February 28, 2020
115
Item 9b.
Other Information
None.
116
Item 10.
Directors, Executive Officers and Corporate Governance
PART III
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 2020 Annual Meeting of Stockholders, to be filed with the Commission no later than April 29,
2020.
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 2020 Annual Meeting of Stockholders, to be filed with the Commission no later than April 29,
2020.
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 2020 Annual Meeting of Stockholders, to be filed with the Commission no later than April 29,
2020.
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 2020 Annual Meeting of Stockholders, to be filed with the Commission no later than April 29,
2020.
Item 14.
Principal Accountant 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 2020 Annual Meeting of Stockholders, to be filed with the Commission no later than April 29,
2020.
117
Item 15.
Exhibits, Financial Statement Schedules
PART IV
(A)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of the Company are included in Item 8 of this report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - As of December 31, 2019 and 2018
Consolidated Statements of Income - For the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income - For the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Shareholders' Equity - For the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows - For the years ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
(A)(2) FINANCIAL STATEMENT SCHEDULES
Certain schedules to the consolidated financial statements have been omitted if they were not required by Article 9 of Regulation
S-X or if, under the related instructions, they were inapplicable, or the information was contained elsewhere herein.
(A)(3) EXHIBITS
The exhibits listed in the Exhibit Index in this Form 10-K are filed herewith or are incorporated herein by reference to other SEC
filings.
Number
Exhibit 3.1
Exhibit 3.2
Exhibit 4.1
Exhibit 10.1†
Exhibit 10.5†
Exhibit 10.6†
Exhibit 10.7†
Exhibit 10.8†
Exhibit 10.9†
Exhibit 10.10†
Exhibit 10.11†
Exhibit 10.15†
Exhibit 10.16
Exhibit 10.17
Exhibit 10.18†
Exhibit 10.19
Exhibit 21.1
Exhibit 23.1
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)
Description of the Registrant's Common Stock
Employment Agreement of Christopher R. Gruseke dated December 29, 2016 (3)
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)
Employment Agreement of Penko Ivanov (4)
Form of Director Indemnification Agreement (2)
Form of Executive Officer Indemnification Agreement (2)
Employment Agreement of Christine Chivily (4)
Agreement dated February 5, 2020 between Lawrence B. Seidman and Bankwell Financial Group, Inc.
Subsidiaries of the Registrant (1)
Consent of RSM US LLP
Certification of Christopher R. Gruseke Pursuant to Rule 13a-14(a)
Certification of Penko Ivanov 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, 2019, formatted in eXtensible Business Reporting Language (XBRL):
(i) Consolidated Balance Sheets; (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.
118
† 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.
(3) Filed as part of the Registrant’s December 31, 2016 Form 10-K.
(4) Filed as part of the Registrant's June 30, 2018 Form 10-Q.
Item 16.
Form 10-K Summary
None.
119
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
Pursuant to the requirements of the Securities Exchange 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.
BANKWELL FINANCIAL GROUP, INC.
By:
/s/ Christopher R. Gruseke
Christopher R. Gruseke
President and Chief Executive Officer
Signature & Title
/s/ Christopher R. Gruseke
Christopher R. Gruseke
President and Chief Executive Officer
(principal executive officer)
/s/ Penko Ivanov
Penko Ivanov
Executive Vice President & Chief Financial Officer
(principal financial and accounting officer)
/s/ George P. Bauer
George P. Bauer
Director
/s/ Gail Brathwaite
Gail Brathwaite
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 M. Garnett
James M. Garnett
Director
/s/ Daniel S. Jones
Daniel S. Jones
Director
/s/ Todd Lampert
Todd Lampert
Director
/s/ Victor S. Liss
Victor S. Liss
Director
/s/ Carl M. Porto
Carl M. Porto
Director
120
Date
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
Exhibit 4.1
DESCRIPTION OF THE REGISTRANT’S SECURITIES REGISTERED PURSUANT TO SECTION 12 OF
THE SECURITIES EXCHANGE ACT OF 1934
Bankwell Financial Group, Inc., a Connecticut corporation (the “Company”), has the following
classes of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended.
DESCRIPTION OF COMMON STOCK
The following description of the Company’s common stock is a summary and does not purport to be complete. It is
subject to and qualified in its entirety by reference to the Company’s Certificate of Incorporation, as amended, and the
Company’s Amended and Restated Bylaws, each of which are incorporated by reference as an exhibit to the Annual
Report on Form 10-K of which this exhibit is a part. We encourage you to read the Company’s Certificate of
Incorporation, as amended, the Company’s Amended and Restated Bylaws, and the applicable provisions of the
Connecticut Business Corporation Act for additional information.
Authorized Shares
Under the Company’s certificate of incorporation, the Company has authority to issue 10,000,000 shares of common
stock, no par value per share.
Voting
Each holder of the Company’s common stock is entitled to one vote for each share on all matters submitted to the
shareholders, except as otherwise required by law and subject to the rights and preferences of the holders of outstanding
shares of the Company’s preferred stock, if any. Holders of the Company’s common stock are not entitled to cumulative
voting in the election of directors.
Dividends and other distributions
Subject to certain regulatory restrictions and to the rights of holders of any preferred stock that the Company may
issue, holders of common stock are entitled to receive dividends from legally available funds, when, as and if declared
by the Company’s board of directors. If the Company liquidates or dissolves, holders of common stock are entitled to
share ratably in the Company’s assets once the Company’s debts and liabilities (including all deposits in Bankwell
Bank and interest accrued thereon) and any liquidation preference owed to any holders of then-outstanding preferred
stock are paid.
Preemptive Rights
The terms of the Company’s common stock do not entitle the Company’s shareholders to preemptive rights with
respect to any shares of capital stock which may be issued.
Anti-Takeover Effect of Governing Documents
Certain provisions of the Company’s Certificate of Incorporation, as amended, and Amended and Restated Bylaws
highlighted below may have anti-takeover effects and may delay, prevent or make more difficult unsolicited tender
offers or takeover attempts that a shareholder may consider to be in his or her best interest, including those attempts
that might result in a premium over the market price for the shares held by shareholders. These provisions may also
have the effect of making it more difficult for third parties to cause the replacement of the Company’s management.
Among other things, the Company’s Certificate of Incorporation, as amended, and Amended and Restated Bylaws:
•
•
•
restrict the exercise of voting rights by “interested shareholders,” as described below, for the amendment of
certain provisions of the Company’s Certificate of Incorporation and Amended and Restated Bylaws;
prohibit shareholder action by written consent in lieu of a meeting;
prohibit business combinations with an “interested shareholder,” as described below, for five years following
an acquisition of shares by such “interested shareholder,” unless approved by the Company’s board of directors;
•
•
•
•
•
•
•
•
•
•
•
enable the Company’s board of directors to issue “blank check” preferred stock up to the authorized amount,
with such preferences, limitations and relative rights, including voting rights, as may be determined from time
to time by the Company’s board of directors;
prohibit the acquisition of 10% or more of the Company’s outstanding voting stock unless approved by at
least 2/3 of the Company’s directors then in office;
prohibit any person from making an offer to acquire 10% or more of the Company’s outstanding voting stock
without prior notice to the Company’s board, and in case the board has disapproved such offer within 15 days
following such notice;
allow the Company’s board of directors, when considering any tender or exchange offer for the Company’s
stock, or proposal to merge, to take into account factors other than the interests of the Company’s shareholders,
such as long-term and short-term interests of the corporation, and the interests of the Company’s employees,
customers, creditors, suppliers, and the Company’s surrounding community;
provide for the limitation of liability and indemnification of the Company’s officers and directors;
require a 60% vote of the Company’s shareholders to repeal the sections of the Company’s certificate of
incorporation addressing limitation of liability and indemnification of the Company’s officers and directors;
prohibit the removal of directors other than for cause, or by a vote of at least 2/3 of the Company’s directors
then in office, or by an affirmative vote of at least 80% of the voting power of the Company’s outstanding
voting stock;
enable the Company’s board of directors to increase, between annual meetings, the number of persons serving
as directors and to fill the vacancies created as a result of the increase by a majority vote of the directors present
at the meeting;
provide that only the Company’s Chairman, the Company’s President or a majority of the Company’s board
of directors have the ability to call a special meeting of the Company’s shareholders;
do not provide for cumulative voting rights (therefore allowing the holders of a majority of the shares of
common stock entitled to vote in any election of directors to elect all of the directors standing for election, if
they should so choose); and
establish an advance notice procedure with regard to business to be brought before an annual or special meeting
of shareholders and with regard to the nomination of candidates for election as directors, other than by or at
the direction of the Company’s board of directors.
The amendment of certain provisions of the Company’s Certificate of Incorporation, as amended, including,
without limitation, provisions governing certain business combinations, special meetings of shareholders, director
liability, removal of directors, nominations for directors, action by shareholders, approval for certain acquisitions and
offers to acquire voting stock and consideration for merger consolidation or other offers must be approved by the
affirmative vote of the holders of not less than sixty percent (60%) of the issued and outstanding shares of the Company’s
capital stock entitled to vote thereon. In case the Company has an “interested shareholder,” the affirmative vote of not
less than sixty percent (60%) of the issued and outstanding shares of the Company’s capital stock entitled to vote thereon
other than shares held by the “interested shareholder” is required. An “interested shareholder” is defined in the
Company’s Certificate of Incorporation, as amended, as any person who beneficially owns ten percent or more of the
voting power of the Company’s outstanding voting stock, or who is an affiliate or associate of the Company’s (as
defined under Connecticut corporate law) and has beneficially owned ten percent or more of the voting power of the
Company’s outstanding voting stock at any time within the five years immediately preceding such vote, or any successor
or transferee of such shares held by an “interested shareholder” at any time within such five-year period.
Our Amended and Restated Bylaws may be altered, amended, added to or repealed either by the affirmative vote
of the holders of a majority of stock entitled to vote thereon or by the affirmative vote of a majority of the Company’s
board of directors. However, the affirmative vote of sixty percent (60%) of the issued and outstanding shares entitled
to vote thereon is required (i) by the terms of the Company’s Amended and Restated Bylaws, to amend certain bylaw
provisions, including those dealing with shareholders’ meetings (including annual meetings), shareholder nomination
of director candidates, removal of directors and filling of vacancies on the Company’s board of directors; and (ii) by
the terms of the Company’s Certificate of Incorporation, as amended, for any shareholder action effecting an amendment
or repeal of or an adoption of a provision inconsistent with the Company’s Amended and Restated Bylaws. In all such
cases, if there is an “interested shareholder,” as described above, the sixty percent (60%) vote must include the affirmative
vote of the issued and outstanding shares entitled to vote thereon held by shareholders other than the interested
shareholder.
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements (Nos. 333-197040 and 333-199104) on Form S-8 and
(No. 333-205922) on Form S-3 of Bankwell Financial Group, Inc. of our reports dated February 28, 2020, relating to the consolidated
financial statements and the effectiveness of internal control over financial reporting of Bankwell Financial Group, Inc., appearing
in this Annual Report on Form 10-K of Bankwell Financial Group, Inc. for the year ended December 31, 2019.
Exhibit 23.1
/s/ RSM US LLP
New Haven, Connecticut
February 28, 2020
I, Christopher R. Gruseke, certify that:
CERTIFICATIONS
1. I have reviewed this annual report on Form 10-K of Bankwell Financial Group, Inc.
Exhibit 31.1
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented
in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the
Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial
information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
Registrant’s internal control over financial reporting.
Date: February 28, 2020
/s/ Christopher R. Gruseke
Christopher R. Gruseke
President and Chief Executive Officer
I, Penko Ivanov, certify that:
CERTIFICATIONS
1. I have reviewed this annual report on Form 10-K of Bankwell Financial Group, Inc.
Exhibit 31.2
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented
in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the
Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial
information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
Registrant’s internal control over financial reporting.
Date: February 28, 2020
/s/ Penko Ivanov
Penko Ivanov
Executive Vice President and Chief
Financial Officer
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32
The undersigned, Christopher R. Gruseke and Penko Ivanov hereby jointly certify as follows:
They are the Chief Executive Officer and the Chief Financial Officer, respectively, of Bankwell Financial Group, Inc. (the
“Company”);
To the best of their knowledge, the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the
“Report”) complies in all material respects with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as
amended; and
To the best of their knowledge, based upon a review of the Report, the information contained in the Report fairly presents,
in all material respects, the financial condition and results of operations of the Company.
/s/ Christopher R. Gruseke
Christopher R. Gruseke
President and Chief Executive Officer
Date: February 28, 2020
/s/ Penko Ivanov
Penko Ivanov
Executive Vice President and Chief Financial Officer
Date: February 28, 2020