Bankwell Financial Group, Inc. - Annual Report: 2014 (Form 10-K)

---

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2014
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from _________to________
Commission File Number: 001-36448
Bankwell Financial Group, Inc.
(Exact Name of Registrant as specified in its Charter)

Connecticut		20-8251355
(State or other jurisdiction of		(I.R.S. Employer
Incorporation or organization)		Identification No.)

220 Elm Street

New Canaan, Connecticut 06840

(203) 652-0166

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

 

 

 

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

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

 

 

 

 

 

 

---

---

 

 

PART I
Item 1. Business		1
Item 1A. Risk Factors		25
Item 1B. Unresolved Staff Comments		39
Item 2. Properties		39
Item 3. Legal Proceedings		39
Item 4. Mine Safety Disclosures		39
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Securities		39
Item 6. Selected Financial Data		41
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		45
Item 7A. Quantitative and Qualitative Disclosures About Market Risk		79
Item 8. Financial Statements and Supplementary Data		83
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		144
Item 9A. Controls and Procedures		144
Item 9B. Other Information		145
PART III
Item 10. Directors, Executive Officers and Corporate Governance		145
Item 11. Executive Compensation		145
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		145
Item 13. Certain Relationships and Related Transactions, and Director Independence		145
Item 14. Principal Accounting Fees and Services		145
PART IV
Item 15. Exhibits, Financial Statement Schedules		146
Signatures		147

 

 

 

 

 

 

 

	●	local, regional and national business or economic conditions may differ from those expected;
	●	we are subject to credit risk and could incur losses in our loan portfolio;
	●	our allowance for loan losses may not be adequate to absorb loan losses;
	●	changes in real estate values could also increase our credit risk;
	●	we could experience changes in our key management personnel;
	●	we may not be able to successfully execute our management team’s strategic initiatives;
	●	our ability to successfully execute our growth initiatives such as branch openings and acquisitions;
	●	volatility and direction of market interest rates;
	●	increased competition within our market area may limit our growth and profitability;
	●	economic, market, operational, liquidity, credit and interest rate risks associated with our business;
	●	the effects of and changes in trade, monetary and fiscal policies and laws, including the Federal Reserve Board’s interest rate policies;
	●	changes in accounting policies and practices, as may be adopted by regulatory agencies, the Public Accounting Oversight Board or the Financial Accounting Standards Board;
	●	changes in law and regulatory requirements (including those concerning taxes, banking, securities and insurance);
	●	further governmental intervention in the U.S. financial system; and
	●	difficulties and delays in integrating Quinnipiac Bank and Trust Company.

 

 

 

 

 

 

 

 

 

 

 

 

	●	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 many banking institutions that continue to face credit challenges, capital constraints and liquidity issues and that lack the scale and management expertise to manage the increasing regulatory burden and will likely need to partner with an institution like ours. On March 31, 2014, we entered into a merger agreement with Quinnipiac. Quinnipiac had one branch located in Hamden, Connecticut and a second branch in the neighboring town of North Haven. The transaction closed on October 1, 2014 and Quinnipiac merged with and into Bankwell Bank. As we evaluate potential acquisitions, we will continue to seek acquisitions that provide meaningful financial benefits, long-term organic growth opportunities and expense reductions, without compromising our risk profile.
	●	Utilization of Efficient and Scalable Infrastructure. We employ a systematic and calculated approach to increasing our profitability and improving our efficiencies. We recently upgraded our operating infrastructure particularly in the areas of technology, data processing, compliance and personnel. We believe that our scalable infrastructure provides us with an efficient operating platform from which to grow in the near term, and without incurring significant incremental noninterest expenses, while continuing to deliver our high-quality, responsive customer service, which will enhance our ability to grow and increase our returns.
	●	Disciplined Focus on Risk Management. Effective risk management is a key component of our strong corporate culture. We use our strong risk management infrastructure to monitor our existing loan and investment securities portfolios, support operational decision-making and improve our ability to generate earning assets with strong credit quality. To maintain our strong credit quality, we use a comprehensive underwriting process and we seek to maintain a diversified loan portfolio and a conservative investment securities portfolio. Board-approved policies contain approval authorities, as appropriate, and are reviewed at least annually. We have a Risk Management Steering Committee comprised of executive officers who oversee new business initiatives and other activities that warrant oversight of risk and related mitigants. Internal review procedures are performed regarding anti-money laundering and consumer compliance requirements. Our Chief Risk Officer reports directly to the Chair of our Audit Committee.

 

 

 

	●	Our Market. Our current market has been defined as the greater Fairfield County area, which is part of the second most affluent metropolitan statistical area in the United States, the Bridgeport-Stamford-Norwalk, Connecticut MSA, according to the U.S. Department of Commerce. In addition, our current market has expanded to New Haven County Connecticut with the acquisition of Quinnipiac. The Stamford market area includes numerous affluent suburban communities of professionals who work and commute into New York City, approximately 50 miles from our headquarters, and many small to mid-sized businesses which support these communities. Fairfield County is the wealthiest county in Connecticut, with a 2009 – 2013 median household income of $82,283 according to estimates from United States Census Bureau. We believe that this market has economic and competitive dynamics that are favorable to executing our growth strategy.
	●	Experienced and Respected Management Team with a Proven and Successful Track Record. Our executive management team, is comprised of seasoned professionals with significant banking experience, a history of high performance at local financial institutions and success in identifying, acquiring and integrating financial institutions. Our senior management team includes Christopher Gruseke, Chief Executive Officer (since February 2015) Heidi S. DeWyngaert, Executive Vice President, Chief Lending Officer (ten years with us), Ernest J. Verrico, Sr., Executive Vice President, Chief Financial Officer (five years with us), Gail E.D. Brathwaite, Executive Vice President, Chief Operating Officer (two years with us), Diane Knetzger, Senior Vice President, Director of Marketing (ten years with us), Christine A. Chivily, Senior Vice President and Chief Credit Officer (two years with us) and Michele Johnson, Senior Vice President and Chief Risk Officer (six years with us).
	●	Dedicated Board of Directors with Strong Community Involvement. Our board of directors is comprised of a group of local business leaders who understand the need for strong community banks that focus on serving the financial needs of their customers. One of our directors, Frederick R. Afragola was instrumental in our organization and growth. Mr. Afragola was the Chief Executive Officer and President of The Bank of New Canaan from its opening in 2002 until his retirement in 2008 and played an integral role in building our foundation and guiding our growth. The interests of our executive management team and directors are aligned with those of our shareholders through common stock ownership. By capitalizing on the close community ties and business relationships of our executive management team and directors, we are positioned to continue taking advantage of the market opportunity present in our primary market.
	●	Strong Capital Position. At December 31, 2014, we had a 10.47% tangible common equity ratio, and the Bank had a 11.12% tier 1 leverage ratio and a 12.47% tier 1 risk-based ratio. Our ability to attract capital has facilitated our growth and is an integral component to the execution of our business plan.
	●	Scalable Operating Platform. We provide banking technology, including remote deposit capture, internet banking and mobile banking, to provide our customers with maximum flexibility and create a scalable platform to accommodate our future growth aspirations. We believe that our advanced technology combined with responsive and personal service provides our customers with a superior banking experience.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

●

Truth-In-Savings Act, requiring certain disclosures for consumer deposit accounts;

●

Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

●

Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and

●

Rules and regulations of the various federal banking agencies charged with the responsibility of implementing these federal laws.

●

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.

 

●

Federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

●

Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

●

Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed, or other prohibited factors in extending credit;

●

Fair Credit Reporting Act of 1978, governing the use of consumer credit reports and the provision of information to credit reporting agencies;

●

Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

●

Real Estate Settlement Procedures Act, governing closing costs and settlement procedures and disclosures to consumers related thereto;

●

Servicemembers Civil Relief Act of 2004, governing the repayment terms of, and property rights underlying, secured obligations of persons in military service; and

●

Rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.

 

 

 

 

 

 

 

 

 

●

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

●

Our ability to keep pace with technological advances and to invest in new technology.

 

●

incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, resulting in our attention being diverted from the operation of our existing business;

●

using inaccurate estimates and judgments to evaluate credit, operations, management and market risks with respect to the target institution or assets;

 

 

●

intense competition from other banking organizations and other inquirers for acquisitions;

●

potential exposure to unknown or contingent liabilities of banks and businesses we acquire;

●

the time and expense required to integrate the operations and personnel of the combined businesses;

●

experiencing higher operating expenses relative to operating income from the new operations;

●

creating an adverse short-term effect on our results of operations;

●

losing key employees and customers as a result of an acquisition that is poorly received;

●

significant problems relating to the conversion of the financial and customer data of the entity;

 

●

inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the acquisition;

●

diversion of our management’s attention and resources;

●

integration of acquired customers into our financial and customer product systems; or

●

risks of impairment to goodwill or other than temporary impairment.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Index	05/15/14	06/30/14	09/30/14	12/31/14
Bankwell Financial Group, Inc.	100.00	94.44	105.39	116.67
Nasdaq Composite Index	100.00	108.33	110.42	116.39
Nasdaq Bank Index	100.00	107.01	101.91	109.89

 

 

 

 

 

		At or For the Years Ended December 31,
(Dollars in thousands, except per share data)		2014				2013				2012				2011				2010
Statements of Income:
Interest income		$	35,589			$	28,092			$	24,397			$	20,587			$	16,877
Interest expense			3,929				2,765				3,192				2,870				3,209
Net interest income			31,660				25,327				21,205				17,717				13,668
Provision for loan losses			2,152				585				1,821				1,049				1,311
Net interest income after provision for loan losses			29,508				24,742				19,384				16,668				12,357
Noninterest income			3,041				4,723				345				1,134				1,695
Noninterest expense			25,812				22,120				17,858				14,601				13,331
Income before income tax			6,737				7,345				1,871				3,201				721
Income tax expense			2,169				2,184				657				997				214
Net income			4,568				5,161				1,214				2,204				507
Net income attributable to common shareholders		$	4,458			$	5,050			$	1,082			$	1,998			$	246
Per Share Data:
Basic earnings per share		$	0.78			$	1.46			$	0.39			$	0.72			$	0.10
Diluted earnings per share			0.78				1.44				0.38				0.71				0.09
Book value per share (end of period) (a)			16.84				15.58				14.50				13.85				12.81
Tangible book value per share (end of period) (a) (b)			16.35				15.46				14.50				13.85				12.81
Shares outstanding (end of period) (a)			7,019,620				3,754,253				2,797,200				2,758,200				2,756,200
Weighted average shares outstanding - basic			5,577,942				3,395,779				2,767,850				2,757,000				2,531,000
Weighted average shares outstanding - diluted			5,605,512				3,451,393				2,864,700				2,811,000				2,588,000
Performance Ratios:
Return on average assets (c)			0.52	%			0.77	%			0.22	%			0.50	%			0.14	%
Return on average common shareholders’ equity			5.13	%			9.68	%			2.73	%			6.70	%			0.75	%
Return on average shareholders’ equity (c)			4.66	%			8.17	%			2.40	%			5.03	%			1.33	%
Average shareholders’ equity to average assets			11.14	%			9.32	%			9.34	%			10.01	%			10.37	%
Net interest margin			3.84	%			3.94	%			4.11	%			4.27	%			4.12	%
Efficiency ratio (b)			69.09	%			75.71	%			82.76	%			78.50	%			84.93	%
Asset Quality Ratios:
Total past due loans to total loans (d)			0.86	%			0.73	%			0.75	%			1.01	%			0.79	%
Nonperforming loans to total loans (d)			0.36	%			0.16	%			0.75	%			1.01	%			0.79	%
Nonperforming assets to total assets (e)			0.39	%			0.23	%			0.81	%			0.78	%			0.57	%
Allowance for loan losses to nonperforming loans			323.02	%			835.69	%			200.84	%			171.88	%			239.23	%
Allowance for loan losses to total loans (d)			1.17	%			1.33	%			1.50	%			1.74	%			1.87	%
Net (recoveries) charge-off’s to average loans (d)			(0.05	) %			0.03	%			0.07	%			0.02	%			0.09	%
Statements of Financial Condition:
Total assets		$	1,099,531			$	779,618			$	610,016			$	477,355			$	395,708
Gross portfolio loans (d)			929,762				632,012				530,050				369,294				288,425
Investment securities			76,463				42,413				46,412				94,972				58,152
Deposits			835,439				661,545				462,081				367,115				309,137
Borrowings			129,000				44,000				91,000				58,000				44,000
Total equity			129,210				69,485				51,534				49,188				40,354
Capital Ratios:
Tier 1 capital to average assets (f)
Bankwell Bank			11.12	%			7.91	%			-	%			-	%			-	%
The Bank of New Canaan			-	%			-	%			7.88	%			8.71	%			8.15	%
The Bank of Fairfield			-	%			-	%			8.39	%			11.30	%			13.25	%
Tier 1 capital to risk-weighted assets (f)
Bankwell Bank			12.47	%			9.49	%			-	%			-	%			-	%
The Bank of New Canaan			-	%			-	%			9.09	%			11.07	%			11.86	%
The Bank of Fairfield			-	%			-	%			10.80	%			13.66	%			16.41	%
Total capital to risk-weighted assets (f)
Bankwell Bank			13.55	%			10.74	%			-	%			-	%			-	%
The Bank of New Canaan			-	%			-	%			10.34	%			12.33	%			13.12	%
The Bank of Fairfield			-	%			-	%			12.05	%			14.91	%			17.10	%
Total shareholders’ equity to total assets			11.75	%			8.91	%			8.45	%			10.30	%			10.20	%
Tangible common equity ratio (b)			10.47	%			7.45	%			6.65	%			8.00	%			8.93	%

 

(a)	Excludes preferred stock and unvested restricted stock awards
(b)	This measure is not a measure recognized under GAAP and is therefore considered to be a non-GAAP financial measure. See “Non-GAAP Financial M easures” for a description of this measure and a reconciliation of this measure to its most directly comparable GAAP measure.
(c)	Calculated based on net income before preferred stock dividends
(d)	Calculated using the principal amounts outstanding on loans
(e)	Nonperforming assets consist of nonperforming loans and other real estate owned
(f)	Represents bank ratios. During 2013, The Bank of New Canaan and The Bank of Fairfield were merged into Bankwell Bank.