Company: BWFG
Filing Date: 2025-03-05
Form Type: 10-K
Source: 0001505732-25-000052
Chunk: 51

Company: Bankwell Financial Group, Inc.
Filing Date: 2025-03-05
Form: 10-K
Item: Item 8
Chunk 51
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 the loss rates.  To further refine the expected losses, management selects a group of peer banks to scale the loss rate models to produce an allowance that is representative of the Company’s loan portfolio and geographic area (“peer scalar”).  

To account for economic uncertainty, the Company incorporates multiple economic scenarios in determining the allowance for credit losses. The scenarios include various projections based on variables such as Gross Domestic Product, interest rates, property price indices, and employment measures, among others. The scenarios are probability-weighted based on available information at the time the calculation is conducted. 

Management considers qualitative adjustments to expected credit loss estimates for information not already captured in the quantitative loss estimation models.  The measurement of expected credit losses is influenced by the Company’s judgment of 

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market conditions, changes in loan composition or concentrations, performance trends, regulatory changes, uncertainty in macroeconomic forecasts, or other asset specific risk characteristics.

Key assumptions used in the models include portfolio segmentation, risk rating, forecasted economic scenarios, the peer scalar, and qualitative adjustments, among others. Loan portfolios are segmented by loan level attributes such as loan type, size, date of origination, and delinquency status to create homogenous loan pools. Pool level metrics are calculated, and loss rates are subsequently applied to the pools as the loans have similar characteristics.

We identified the peer bank determinations for scaling, forecasted economic scenarios, and qualitative adjustment components of the allowance for credit losses for loans (herein referred to as “the allowance”) as a critical audit matter because auditing the underlying assumptions in those components involved a high degree of complexity and auditor judgment given the high degree of subjectivity exercised by management in developing the allowance, which resulted in an increase in audit effort due to the impact these assumptions have on the accounting estimate. Additionally, we used an internal economic specialist to assist in auditing the reasonable and supportable forecast based on the subjectivity and complexity involved with determining that assumption.

Our audit procedures related to management’s selection of the models being used in determining the peer bank determinations for scaling, forecasted economic scenarios, and qualitative adjustment components of the allowance included the following, among others:

–We obtained an understanding of the relevant controls related to management’s selection of the peer bank determinations for scaling, forecasted economic scenarios, and qualitative adjustment components of the allowance and tested such controls for design and operating effectiveness.

–We evaluated management’s judgments and assumptions used in the development of the qualitative factors for reasonableness and tested the reliability of the underlying data on which these factors are based, by